We're all restarting our lives, making plans, and perhaps using the lessons of the pandemic to change our priorities and behaviors going forward. Companies are also regrouping, considering new strategies and directions, and a new approach to bring employees closer together and create a new culture. These changes are especially relevant for family businesses, where personal and business objectives often intersect.
Family businesses are particularly intertwined with family dynamics, and many are working on their strategies and operations in response to new demand patterns, as well as new risks and opportunities. The economic and behavioral consequences of the pandemic had varied effects on each market. As such, each family business has tried and is likely to continue to experience different challenges.
This beginning of 2022 is the right time for family leaders to consider how business has been conducted over the past year and what lessons can be learned, particularly in the way the family communicated, how critical and often complex decisions were taken to preserve asset values and manage risk. This article provides guidance on areas of focus when rethinking family and business issues in the post-pandemic period.
Reevaluating investment strategies
Entrepreneurs recognized that the pandemic changed the ways of doing business, that new opportunities and risks emerged. For example, properties in cities dependent on public transportation saw a significant migration of people, where not everyone returned. The pandemic accelerated the move of older adults to the suburbs.
The retail oversupply in many markets has become even more pronounced and the strength of demand for office space remains uncertain as people experience scenarios such as home offices or hybrids. Hotels were immediately impacted by the 2020 lockdowns, and while leisure travel returned, it's still impossible to predict the full restoration of demand for business and group travel. At the same time, many entrepreneurs are selling industrial properties and apartments as investor demand increases.
These rapid and often dynamic market changes require company strategies. Many entrepreneurs are looking for new markets to find better opportunities, changing their investment goals to new types of businesses, planning to reuse or seeking palliative situations and selling portfolios. These strategic changes can only be successful if the company has the right platform, local relationships, access to data, analytical tools and reports, and the availability of capital, to implement the changes optimally. Companies are also analyzing their existing portfolios, reviewing budgets, modeling potential cash flows and capital requirements, and potentially adjusting expected returns.
While many management companies have made substantial progress in improving operational efficiency during the pandemic, they are struggling with increasingly high material and labor costs. Budgeting operating and capital expenditures in an inflationary environment with supply chain disruptions and worker shortages will be challenging for both acquisitions and asset management.
Another more important consideration is: whether the family business has devoted sufficient attention to the environmental, social, and governance (ESG) requirements of a growing number of capital sources. Investors are as concerned with reducing the portfolio's carbon footprint as knowing that the company has developed principles and policies that provide equal opportunities for a diverse group of employees, benefiting the wider community. ESG is changing the way all companies operate and communicate their efforts, creating accountability for supplier selection processes, employee advancement, safety measures and, of course, carbon-neutral projects.
Liquidity monitoring At the beginning of the pandemic, the biggest concern of entrepreneurs was liquidity. Many entrepreneurs were forced to seek agreements with their creditors to fill the liquidity gap, and some families had to put additional capital into the business. Today, depending on the type of business, much of the liquidity crisis has been resolved. Debt markets are fully open, although creditors remain apprehensive about office, retail, and hospitality standards, and underwriting. However, some companies are still paying under modified conditions and must refund reservations. All of this points to increased vigilance over the cash budget, the monitoring of loan compliance, and the preparation for loan maturities.
There is particular concern in family real estate businesses, as the scarcity of money has often translated into a partial or total cut in distributions paid to family members and limited partner investors. Thus, company management must be updating its cash flow models, projecting revised short and long-term income flows based on revised rent and occupancy assumptions, early collection of overdue rent, operating expenses, capital budgets, and debt payments. That way, entrepreneurs can effectively communicate and proactively define the expectations of family members, outside investors, and creditors.
Addressing vulnerabilities Performing a business vulnerability assessment requires an understanding of environmental threats to the market and the location of a business. The investments needed to house the building's mechanical system more securely must be added to the short-term capital budget and considered in cash projections.
The pandemic also brought out two areas of focus necessary for business leaders: fraud prevention and cybersecurity. Often, family businesses do not have the same internal fraud control and prevention processes as institutional actors. Additionally, the internal control environment can be weakened when employees are working from home. The stress caused by the pandemic, furloughs, and wage reductions have the potential to motivate employees to commit fraud.
All businesses, regardless of size, are vulnerable to cyberattacks. While not new, there are a growing number of successful attacks reported on what would be considered to be companies with greater security. As family businesses implement more technology alongside management and accounting software, they also have to invest in security platforms to control and protect the entire IT environment. Additional oversight, enhanced training, evasion, and protocols are all components of an effective IT security plan.
Family harmony The challenges that families experienced in the last year emphasize the importance of empathy and good communication. This is equally true in a family business. Frequent family meetings and improved reporting can be used by leaders to explain changing strategies and the logic for critical decisions that impact family members, including distributions. The more information that can be shared, the better, in order to preserve family harmony and avoid conflict during difficult periods. It is possible that during the pandemic some family members demonstrated conflicting opinions about how the company should deal with suppliers, creditors, and investors. Creating a forum to air out dissenting opinions and formally resolve such disputes can strengthen family ties and prevent continued resentment. Behaviors during the pandemic may have reinforced the need to create or refine family governance, including delegations of authority and reports with richer information.
Past years have also highlighted the need for improved emergency preparedness protocols. Tragically, some families may not have been sufficiently prepared for a sudden leadership succession, both within the family and among the management company's employees, and difficult decisions had to be made in the midst of the storm and not during a period of calm waters. Family gatherings have the opportunity to evaluate skill sets and honestly discuss future family business leaders.
The realization that the health of family members or even lives may be vulnerable to sudden events beyond their control is disturbing, and part of emergency preparation is creating a plan for all family members, which organizes the necessary information if a family member dies or becomes incapacitated. It provides a roadmap for important information and documents that are essential for an easier transition during a difficult time. A typical plan includes finding contact information, passwords, ownership documents, and investment account statements.
Action steps: the post-pandemic checklist
As you move through the pandemic and consider the future, have you taken the following actions for your business and your family?
Business checklist
Update your business strategy; Assess the suitability of the business platform to support the company's new direction; Assess budgets and cash needs; Analyze the refinancing potential of loans with short-term maturies; Identify potential savings from operating expenses; Assess the appropriateness of internal controls; Analyze ways to reduce carbon emissions both for the company and for its portfolio; Perform a formal assessment of the portfolio's vulnerability to climate change; Create a statement of ESG principles;
Family checklist
Hold a family meeting to discuss the company's performance during the pandemic. Redefine family members' expectations about investment returns and cash flows; Update family governance documentation, including succession plans; Consider ways to improve family communication, including regular reporting; Develop emergency preparedness plans; Encourage all family members to prepare a table plan; Update your property and business plans;
Contact TATICCA — ALLINIAL GLOBAL, which provides integrated auditing services, internal auditing, accounting, taxes, corporate finance, financial advisory, risk advisory, technology, business consulting and training, for more information, at www.taticca.com.br or e-mail taticca@taticca.com.br and learn more. Our company has certified methodologies for carrying out activities.
