Advisers 'Stress-Test' Family Business Plans
With conflicting signals about the pace and sustainability of U.S. economic recovery, it's crucial for family businesses to revisit their contingency plans, think about the positioning of their businesses and expectations about growth, according to financial advisers.
Dennis Stearns, president of Stearns Financial Services Group, a fee-only wealth management firm in Greensboro, N.C., who advises family businesses with revenues ranging from $25 million to $250 million, is helping clients get to grips with challenges they are likely to face in 2010 as they seek to survive the effects of the recession.
While Stearns says the consensus view is that the economy will grow slowly next year, he is also preparing clients for the eventuality of a slippage in the latter half of 2010 as the effects of government stimuli fade and the economy fails to find its feet through other means.
"We are encouraging business owners to imagine what this scenario would mean for their customers, supply chain, cash flow and access to credit," says Stearns, so they can put alternatives in place ahead of time that match the family's business and personal financial game plans.
Government data released Friday showed a sharp drop off in consumer spending in September after one popular government subsidy--the "cash for clunkers" auto program-- ended, which doesn't augur well for recovery, especially given the high unemployment rate.
About nine in 10 U.S. businesses are family-owned or controlled, with firms running the gamut from small businesses to a third of Fortune 500 firms, according to the Small Business Administration. Financial advisers and wealth managers work with firms of varying sizes.
The continuing economic uncertainty is prompting other family businesses to take tough decisions as they seek to survive or position themselves for recovery when it comes. Joseph Fahey, the national director of business planning services for Wells Fargo & Co.'s Private Bank, says as part of "stress tests" some clients are deciding which businesses are "core" and where they feel they can gain and or maintain a competitive advantage, and selling the businesses where they will not be as competitive.
"This gives them the financial resources to finance growth and get back into compliance with their creditors," says Fahey. Other business owners are looking to create value-added services to avoid being undercut on price, he adds.
Carmen Bianchi, immediate past president of the Family Firm Institute and director of the EMC Business Forum at San Diego State University, which advises family businesses, says the news isn't all gloomy. The recession is creating "golden opportunities" for family businesses sitting on cash to diversify their holdings and lower their operating costs. For example, one client, a big distributor, recently snapped up a key supplier that had filed for bankruptcy, decreasing its expenses.
Still, like Stearns, Bianchi is advising clients to carefully monitor the behavior of suppliers and customers for signs of financial trouble.
While the stress of the economic situation is leading some families to pull together to save their businesses, in others it is causing long-held gripes or personality differences to bubble to the surface, which can impede clear decision making-–and make for uncomfortable Thanksgiving dinners. Bringing in a professional mediator can help defuse tensions by injecting rationality.
James Lea, an independent adviser to family-owned and other closely held businesses, who is also a professor at the University of North Carolina at Chapel Hill, is helping three brothers who run a business with slipping sales make cost cuts, breaking months of deadlock.
Victoria E. Knight is a Getting Personal columnist who writes about personal finance; she covers topics including the financial implications of health-care issues and the financial needs of small businesses. She can be reached at 212-416-2235 or by email at victoria.knight@dowjones.com.
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