Family business owners always manage through uncertainty, but today’s environment proves mind-bogglingly difficult to navigate. Homeowners are facing the highest inflation since 1981. The Fed is raising interest rates sharply to stop a wage-price spiral. But that could cause another recession this year, most economists believe. All of this is happening while hiring remains difficult and kinked supply chains further hamper business operations.
Wow! In these adverse circumstances, how can entrepreneurs cope with these challenges? At a recent employee-owned S Corporations of America (ESCA) conference, executives from some of the largest ESOP companies in the country shared their views. Here are six corporate primaries they passed on:
1. In the short term, rising interest rates are the biggest challenge. Chief Financial Officers must focus on managing working capital and ensuring that their company’s balance sheet is strong. Extending maturities to remove short-term funding pressures and hedging variable rate risk through swaps or a forward facility may be sensible measures.
2. The prospect of a recession is the next most pressing issue, and business leaders said the steps they took after the first wave of COVID-19 in early 2020 proved a dress rehearsal for the steps they’re considering: cutting costs quickly to improve cash flow maintained due to lower income. By ranking your most critical initiatives, you can determine where to look without compromising essential features. Proactively contact lenders and inform them of the steps to be taken. Lenders will appreciate this, and the goodwill will lay a foundation if you need to approach them for loan waivers or changes.
3. In the longer term, inflation is the most worrying thing, and it can be difficult to correct as, as management consultant Ram Charon sees it, business leaders have lost the muscle memory to deal with rising prices, which they have done for nearly 40 years have not had to deal with years. Working in an environment of rising costs places a premium on careful product pricing, cost control through conscious purchasing and working capital management, including keeping accounts receivable as low as possible. As Charon points out, CEOs must sound the alarm internally about inflation as the No. 1 enemy to ensure that finance, HR, procurement, marketing and other key functions respond in a coordinated manner to the challenges of inflation.
4. Since employee engagement is especially critical in these stressful scenarios, make it clear to your employees how rising interest rates, inflation, or a recession are affecting your business. Communicate your strategy to get through tough times. This is also the time to ask for suggestions from employees to make savings and court customers.
5. When it comes to talent and the intense pressure to find and hire superior personnel, your human resources team must work with your management team to identify and retain your best performers. And this can be a great time to pursue strategic talent acquisitions that would have previously been impossible, and to recognize that younger talent seeks personal and professional development to advance their careers.
6. Successful CEOs will convene a “war council” of their top executives to demonstrate the urgency of the present moment and get their perspectives on the challenges affecting your company. You need your leadership team to understand the implications so that they avoid their own specific silo and focus on the entire operation to get your business through a rough patch.
Directors and Advisors: Private company leaders encouraged to contact the board of directors and advisors for their perspectives. Ideally, your board should consist of directors with diverse skills and views. Some are likely to have experienced previous recessionary cycles or past periods of inflation and rising interest rates and can share useful insights.
Strategic Planning: Aside from day-to-day activities, participants consider it essential to step back and focus on what you see as the company’s future. By completing a strategic planning exercise, you have thought through business goals and identified key and secondary priorities, as well as current and future risks. In stressful times, you want to hoard capital that supports the most opportunistic initiatives and limit resources, or completely curtail lower priority or riskier projects. If you have not yet completed such an exercise, it now gives you confidence in the actions you take and limits reflexive but short-sighted actions that harm the enterprise.
M&A: Rising interest rates and recessions typically lead to lower deal volumes – and the deals being made may be at lower multiples to discount current adverse business conditions and reflect lower comparable public company numbers. But that said, high-quality companies with strong financial statements and momentum can always find buyers. With all the economic headwinds, we are detecting longer sales processes driven by buyers’ diligence and sellers’ uncertainty. Note: For the good news in disruption, companies with strong balance sheets will find it pays to be a counter-cyclical buyer and take advantage of opportunities previously unavailable.
Finally, if you haven’t already, develop a strategy to secure your interest in the business or transfer it to achieve your and your family’s goals. Developing a thoughtful plan takes time, and if you haven’t done so before, now is the chance to think strategically about maximizing the long-term value of the business you’ve worked so hard on.