The fallout from Covid-19 will continue to impact the economy. Much has changed. From lacklustre short-term growth prospects across some sectors to shifting consumer behaviour and from increasing reliance on hybrid work culture, to the necessary evolution of the high street and leisure and hospitality sectors. What’s more Brexit has dramatically increased the complexity of cross border trading. Of course, despite - and in some case because of - all this challenge, a decent proportion of privately owned businesses are thriving.
Miles Davies, Managing Director of KPMG’s Family Business team, says the current changes in the economy are triggering a series of themes impacting the strategic planning of families in business regardless of current commercial performance. These span diversification, mergers and acquisitions, transformation, succession management and governance.
Diversification
“Diversification is a red-hot topic. Entrepreneurial families are looking to diversify their portfolio in many cases, to address current and potential shifts in risk and reward. The pandemic has taught some that they are overly exposed in one sector of the market. We are seeing a degree of retreat from city centre property and retail for example, while opportunities underpinned by digital are in higher demand than ever. Many of our clients are increasingly focused on securing their family’s wealth for the future in diverse pockets.”
Mergers and Acquisitions
The appetite for portfolio shifts, plus the uncertainty around capital taxes wrought by the widespread speculation of wealth taxes and changes to capital gains tax, are triggering exceptionally high levels of M&A activity, says Miles,
“The M&A market had all but dried up last year. Very few deals were done with everyone still in a wait-and-watch mode. There is now a lot of hungry capital in the market, whether from private equity or entrepreneurial investors, waiting to be deployed in the right areas driving unprecedented levels of activity.
Potential tax changes are also leading to a number of businesses seeking to expedite their exit strategy: one of Miles’s recent projects was for a client who were in early discussions to buy a business who was also a joint venture partner. The acquisition was planned for 2023 but was accelerated owing to the owners concerns of capital gains tax reform and they have just signed contracts.
A high-profile illustration of how changing customer behaviour and stress in one area spells opportunity in another is the acquisition of Debenhams, one of the country’s oldest department store chains, by online fast-fashion giant Boohoo. While the Debenhams brand name is likely to remain, the conversion of its 118 physical stores to a ubiquitous online presence has created a stir in the retail economy.
Transformation and Succession
Covid-19 may prove to have changed the succession landscape in family businesses as the need to transform at speed has, in many families, seen the next generation step up faster and in a more critical way than ever before. In some cases, business survival relied on them playing to their strengths, for example in taking the business online or pivoting into a new market.
“Our new report into how family businesses have responded to, and been impacted by, the pandemic found that the renowned agility of the market was highlighted, with the research showing family firms were than 42% more likely than other businesses to transform themselves in the last year. What’s more, transformation was 45% more prevalent in those with multiple generations involved in the business. This really represents the next gen setting the business up for the future,” says Miles, adding,
“It can be incredibly difficult to let go, so it may be comforting for some business leaders to know that research demonstrates that there is commercial sense in letting the millennials takeover. Our previous surveys have highlighted those family businesses run by millennials or generation X out-performed counterparts run by older generations. Firms run by the former have proved to be more profitable and have grown at a faster pace.
“I expect recent experience to trigger some hard thinking by existing family leaders about the future and the handing over of the business to the next generation sooner than might have happened before the pandemic.”
Considering the febrile atmosphere, Miles believes that succession planning and smooth transition of power between generations could help firms maximise profits and better optimise their revenue models.
Importance of Governance
Covid-19 has put governance more firmly on the agenda says Miles: “At the extreme it has raised the issue of what happens if the head of business suddenly becomes incapacitated and cannot run the business. Who takes over and how do things operate then? This has become the most vital question for most businesses to answer in recent times.
“There is an inherent resilience built into many family businesses; the family. Our research found that in a number of businesses - 10% - the current family leadership was taken out of action by Covid-19 in recent months and another member of the family stepped up to lead in their absence. I wonder, was this a managed process, following established procedures?
“Simultaneously, as you might expect during challenging times, we are hearing of an increase in conflict in family businesses during the pandemic especially between the second-third generation where multiple members of the family are in the business. This means that a diverse group of people are operating the business with a diverse set of priorities and ideas of how it should be operating and responding to changing circumstances.
“It is therefore imperative that good governance is in place to avoid and manage conflict. It includes considering the necessary forums; having an owner’s assembly or council as well as an executive board; thinking about the relationship and communication between these groups; defining roles and responsibilities, ensuring all are clear on who and how decisions are made, and who has the right to be consulted and kept informed.
As well as helping to protect against and guide the handling of conflict, good governance also helps with succession. Ultimately, if you are clear on your shared purpose and you have strong governance then you have the foundations to flourish for generations to come.
