8 minute read 30 Sep 2020
EY Man sailing boat into the sunset

Six things family business owners should be thinking about during COVID-19

Authors
Tom Evennett

Partner, Private Client Services, Ernst & Young LLP

UK&I Family Enterprise Leader. Advises UHNW individuals, families and entrepreneurs and their private offices and wealth structures in UK and globally. Avid follower of Crystal Palace Football Club.

Alexander Hayward

Senior Manager, UK&I Family Office Market Leader, Private Client Tax, Ernst & Young LLP

Enhancing long-term success of family businesses. Focused on family governance, office set up and review. Over twelve years of research-led consulting. Avid scuba diver. Trustee of a refugee charity.

8 minute read 30 Sep 2020

As business continues to emerge from the pandemic, Tom Evennett, EY’s UK&I Family Enterprise Leader and Alexander Hayward, from EY’s Family Enterprise Services Team, discuss the priorities for family business leaders.  

In brief:

  • Sustainability, resilience and responding innovatively to economic disruption have been hallmarks of successful family businesses
  • Succession planning and bringing the next generation in is critical for the continuity of any family business
  • Successful family businesses must consider their social impact, culture, remote working opportunities and how they finance growth

Family-owned businesses form a key pillar of economic activity, offering stability, a commitment to the long term, and responsibility to their communities and employees. They face unique challenges however, particularly during crises, which differ to those of public or other forms of private businesses. In order to navigate those challenges, family business leaders should consider how their business fares against these six priority areas:

  1. Sustainability and Resilience
  2. Succession and Inheritance
  3. Diversification of Family Wealth and the Next Generation
  4. Social Impact
  5. Global Mobility and Residence
  6. Navigating Liquidity and Financing

While COVID-19 has presented personal and professional challenges for us all, it has also presented a unique opportunity for leaders to stop and take stock of their business models, question their operational sustainability and resilience, and to formalise their governance structures. This should enable changes that will safeguard businesses today and for the future.

1. Sustainability and resilience

Sustainability, resilience and responding innovatively to periods of economic disruption have long been hallmarks of successful family businesses.

In today’s rapidly changing business environment, with fluctuating market trends, new technologies and globalisation forcing companies to regularly adapt their operations, it is increasingly important to be aware of what exactly it is that makes a family business resilient.

One of the notable advantages enjoyed by many family-owned businesses is their ability to respond quickly to crises. COVID-19 highlighted the importance of flexibility, with companies forced to close offices, factories and warehouses almost overnight. The ability to successfully shift to full-time remote working has been key to survival during this period of uncertainty.

Company governance and structure issues have traditionally presented challenges for some family businesses, often due to family dynamics. Those that invest in sound governance frameworks are most likely to be able to adapt quickly during periods of crisis.

Identifying a business model that enables agility and adaptation is key, alongside strategic planning. Therefore, family businesses often thrive due to their commitment to delivering on effective long-term objectives.

Further, the ability of a business to attract and retain talent is often a good indicator of its resilience. In general, family businesses are more successful at retaining talent than most. A culture that helps drive low staff turnover is beneficial during a period of crisis, when employee commitment is key.

As the COVID-19 landscape and public policy continues to evolve, we see family businesses focused on nine facets of resilience:

2. Succession and Inheritance

Succession planning is critical to the success and continuity of any family business.

A common misconception is that there are certain pivotal points at which succession planning becomes a priority. In reality, like all businesses, family businesses are in a constant state of change and development. Therefore succession planning should have be a consistent focus throughout a company’s lifecycle.

While around three quarters of family businesses plan to pass ownership to the next generation, according to the Family Business Survey by the National Bureau of Economic Research’s Family Business Alliance, many leaders find themselves so involved in day-to-day operations that they can lose their sense of objectivity in succession planning.

Long-term planning and education are central components in any succession plan. If the management and ownership of the family business is to be passed down to younger generations, they need time to develop the requisite skills and experience, as well as a genuine interest and passion for the business if they are to share the family’s long-term goals.

Family business leaders considering succession plans should be looking closely at: 

  • Setting up structures to define the boundaries between business and personal assets.
  • Ensuring the tax and legal aspects of these structures support succession planning.
  • Leveraging a broader group of non-family members to promote multi-generational growth.
  • Focusing on ‘Intra-preneurship’, opportunities for different generations to develop within the enterprise.

3.  Diversification of Family Wealth and the Next Generation

Family businesses can become vulnerable during leadership transition, often due to conflict between the desire to maintain and respect tradition, and the need to adapt and progress the business in response to the changing environment.

Younger generations may have a different vision for the future, such as exploring new technology, extending the company’s services or expanding into new markets.

As businesses continue to respond to COVID-19, there is an opportunity to explore these possibilities and allow the next generation to gain valuable crisis management experience, so they are prepared should a similar situation arise in the future.

When bringing the next generation in to the business, key considerations for leaders include:

  • Allowing the next generation to apply fresh ideas and skills to the business. This could make the difference between falling behind and flourishing in the current climate.
  • Inviting younger family members to join the board, involving them in key decision making and communication so they can develop a clear and confident voice with stakeholders.
  • Reviewing the EY Next Generation Program, designed to support the development of family members at different ages.

4.  Social Impact

Family businesses, like others, are focusing further on their social and environmental impact. From how they take care of their employees during a crisis to steps they take to give back to and support their local communities, successful family businesses place a huge focus on culture, purpose and value in their operations and strategy.

In 2018 the high street retailer Timpson was awarded the Family Business Award of Excellence at the EY Entrepreneur of the Year Awards. Recognised for its creative approach to employee engagement and innovative work helping ex-offenders in the local community, Timpson was highlighted as a ‘national example of how a business demonstrates its values and social purpose’.

Framing goals, not just around the immediate family but through the lens of local communities, can often help provide owners with a clear purpose and focus for how they want to use their wealth, particularly as new leaders begin to take over the reins.

In addition, and much like every other business as they plan ahead, family businesses should be using this period to review diversification and how they are engaging with their clients and communities.

Growing the family business sustainably, whilst taking responsibility for others through philanthropic and social engagements, should be a key focus for leaders.

As Family leaders look over the horizon, they expect an increased focus on their company’s social impact and its importance for both their customers and their employees.

Research before COVID has shown that 55% of employees would opt to work for a socially responsible company, even if the salaries were lower, while 33% of consumers look for socially responsible brands. (Research: Unilever and Just Means). The impact of COVID on these attitudes is yet to be fully understood.

5.  Global Mobility and Residence: Does it work for the family and the business?

With employees and businesses demonstrating the effectiveness of remote working, COVID-19 has shone a spotlight on the mobility and location of global workforces.

When lockdown began there was an initial flurry of family business owners considering whether to stay residing in the country in which their company is based or quickly relocate abroad to second homes before borders closed. For those deciding to work remotely from abroad, this raised a multitude of questions around tax and whether their company would be liable to pay taxes under various jurisdictions.

While some tax authorities have issued temporary relaxation of rules around residency and permanent establishment to facilitate those remotely working from other jurisdictions, it is still unclear whether longer-term decisions will be contemplated which would safeguard family business leaders working on a remote basis from overseas.

To help businesses keep up to date with the significant changes to payroll, tax and social security laws around the world, we have produced a Global Mobility Response Tracker

6.  Navigating Liquidity and Financing

Responsible for a major part of worldwide economic growth, family businesses are of increasing interest to investors. However, despite this strong interest, financing growth is a recurring challenge for family businesses with owners often very reluctant to offer equity in the capital markets.

According to the EY 2018 Family Business report, just 38% of the world’s largest family-run businesses have either used or are currently using private equity as a source of capital.

Like all businesses, family businesses must grow in order to survive and thrive, however, we often find that they tend to shy away from diluting equity holdings in their companies, and prefer to retain as much ownership within the family as possible.

As the business climate continues to evolve, it is essential that owners place a key focus on liquidity and robust financing if they are to weather the tough economic conditions that lie ahead.

Family businesses are continuing to look closely at the following:

  • Tax cost recovery strategies, activate tax refunds, carryforwards, etc.
  • Revised sourcing strategies and agreements
  • Supplier contract and credit terms renegotiations
  • Communications to gain stakeholder confidence and support credit and contract renegotiation

Thoughts for the future

Whilst family businesses are always evolving and adapting, crises often prompt reflection. Leaders should use these situations to consider what’s next for the business and, indeed, the family.

Long-term planning is key to success. With the business climate continuously in a state of change, family business leaders can benefit from considering what they want to achieve personally, and for the business, and whether their current strategy will facilitate these objectives.

Owners are faced with a multitude of challenges as they try to combine growth acceleration with building the family legacy. Planning for the future can be daunting without detailed insights into what other family businesses are doing and how they are adapting to market disruption. Stopping to take stock of these priority areas and assess whether more work needs to be done to develop a clear way forward for each strategic pillar is the first step towards ensuring a family business is robust, resilient and ready to navigate through all market conditions.

Summary

In EY’s Real Insights series, we invite inspiring family and owner-managed business to share their experiences and challenges. In this article, Tom Evennett and Alexander Hayward discuss how leaders should use these disruptive times to consider what’s next for the business and, indeed, the family as long-term planning is key to success.

About this article

Authors
Tom Evennett

Partner, Private Client Services, Ernst & Young LLP

UK&I Family Enterprise Leader. Advises UHNW individuals, families and entrepreneurs and their private offices and wealth structures in UK and globally. Avid follower of Crystal Palace Football Club.

Alexander Hayward

Senior Manager, UK&I Family Office Market Leader, Private Client Tax, Ernst & Young LLP

Enhancing long-term success of family businesses. Focused on family governance, office set up and review. Over twelve years of research-led consulting. Avid scuba diver. Trustee of a refugee charity.