Recession means agony, opportunity - managing a family business during economic downturns

Nation's Business, March, 1991 by Craig E. Aronoff, John L. Ward

Recession Means Agony, Opportunity Family businesses have special strengths and special weaknesses. Both are magnified during economic downturns.

Recessions can create opportunities for certain family businesses. The long-term perspective of family businesses. The long-term particularly well through tough economic times. But downturns can inflict particular anguish as well.

First, let's review the opportunities. A well-managed, committed family busness can gain competitive advantage during a recession. While public companies or highly leveraged entrepreneurial firms slash budgets to please shareholders and creditors, the family company can resolutely sustain strategic expenditures.

From research comparing family and nonfamily companies, we know that family firms cut research, development, and marketing investments less during downturns. Continued investment reflects long-term perspectives that can help family firms gain some market share and increase future strength.

Conservatively managed family-owned companies can use financial resources to make strategic acquisitions at attractive prices when economic circumstances make others eager for cash. Bargains may be available in the form of inventory, equipment, expansion space, or whole businesses.

Recognizing that good people are scarce and valuable, family firms treat employees differently in recessions. They are more reluctant to let people go.

Loyalty and investing for the future are important strengths of a good family business's culture.

In short, the family owners can and often do sacrifice their own current profits in order to build a stronger business for better economic circumstances to come.

But the pressures on family-business owners during a recession can be incredible. The decisions are harder, more serious, and more lonely. Risk, never an easy matter to deal with in family businesses, increasingly becomes an issue. Family-business executives regularly deal with matters involving both the heart and the head. During rough economic times, distinguishing between logic and emotion is more necessary and even more difficult than in less demanding economic environments.

When economic pressures cause serious consideration of a reduction of staff, for example, the family firm faces many tough questions and concerns, which might be expressed in various ways:

* "We hire lots of folks who are related to other employees. How would laying off employees' relatives affect those who remain?"

* "We're a leader in our community--what will people say? Don't we have a special responsibility to--and visibility among--our neighbors?"

* "How will people know that this decision was justified? We don't share our financials publicly, and, as owners, we will still live a good lifestyle."

* "If we choose to cut everyone's pay instead of cutting jobs, how will it affect family members' standard of living? Our resources are tied up in the business, and we don't have much of a personal financial cushion."

Other pains also sting more sharply in a recession. Family employees who fail to carry their fair share of the load are more noticeable and worrisome. That personal guarantee on the bank loan haunts more.

Since many family-business owners are so dedicated to the future, decisions to cut back in marketing or computer installations or new-product development are tougher. How soon do you make those decisions? How do you know you're thinking objectively about them?

Struggling to deal with recession provokes other kinds of thinking: "Maybe we could support overhead by taking on more marginally priced business. Maybe we should seek other kinds of less related business to keep the place busy." At times, it seems any business can help. More often, additional business of this type is distracting and actually reduces profit because it is more costly to produce and handle than orginally thought. Unfamiliar with products, processes, or customers, your people and systems aren't prepared.

Here are several recommendations to help you cope with the agony of these decisions if the recession has affected your business--or to help you prepare for that eventuality:

First, avoid family dilemmas by being sure all family members are fully qualified for their positions in the company. In good times, we don't look at this issue so closely.

Second, encourage all family members to maintain reasonable lifestyles and practice personal saving from their paychecks. The business may not always be able to afford to increase salaries or even keep them level.

Third, review your commitment to family-business ownership and continuity. There's no better time to articulate your vision and resolve than in tough times.

Fourth, practice explaining to all employees that everyone is more secure when the business is healthier. Share information at management and employee meetings to earn their trust.

Finally, and most important, get help--from two sources: your board of directors and your advisers.

The tougher the business decisions are, the more reluctant many business owners are to ask for help.