Running a family business is often the ultimate “American Dream” scenario. And while starting a family business is easier than ever and passing it down to the next generation is what many small business owners strive for, it does come with its own unique risks and liabilities.
One of those is the impact to the family, both personally and professionally, if the economy dives into recession territory. In 2019, only a third of small business owners, including family businesses, said they felt prepared for a recession should it occur in the next six months. Fast-forward to our current economic downturn, a result of the global pandemic, and a full 90 percent of family-owned businesses report that they’ve been negatively impacted.
If your family business has faced bankruptcy or financial hardship after the uncertainty and wild economic fluctuations we’ve dealt with in 2020, you might be wondering how to recession-proof your business to be prepared for the next downswing. Here, we offer five steps you can take right now to get your family and your business ready for whatever the economy may bring.
Strategy #1: Incorporate, If You Haven’t Already
Many home and family-based businesses start out as sole proprietorships. They are easy to launch, have lower startup costs and don’t require much (if any) paperwork. They also offer little to no protection to business owners. Forming an LLC, which can be done for $0 through Incfile, provides a buffer between your personal and business finances, so your family’s assets will be protected, even if your business faces financial challenges.
While it isn’t typically difficult to incorporate your business, you’ll want time to research the benefits and requirements for different entities, from LLCs to S Corps and C Corps, to find out which one is right for your business. Don’t wait until a recession hits to realize your family’s financial security is at stake, and incorporate now.
Strategy #2: Secure Funding Before You Need It
Cash flow is the biggest key to running a successful business, and it can make or break your company’s future. You may not think about when you’re doing well and feeling comfortable, but your business’s survival could depend on it during a recession. Right now, only 30 percent of family-owned businesses transition into the second generation, and the rate sinks lower for every subsequent generation. This may be due to family conflict or strain over succession, but it can also depend heavily on the economy each generation faces.
Be prepared to move quickly if the economy takes a turn for the worse. Start researching various types of business loans, cash advance options and emergency funding and aid now, before you need it. Make sure your business documents, like tax returns or financial statements, are in order, so you aren’t scrambling in the midst of an economic panic.
Charlene Walters, author, speaker and business mentor from Own Your Other, also suggests beefing up your bank accounts, no matter the type of business you have. “Have some savings put away to protect you for a period of time in case you experience a decline in business (six months to a year). Know that the setbacks are only temporary and be resilient to face obstacles and get you through.” She further adds, “Be flexible. As we’ve seen recently, you’ve got to be able to adapt to whatever is happening around you. For example, recently most businesses have needed to become virtual and find new ways of selling to and interacting with their customers.”
Strategy #3: Separate Your Family’s Finances and Make Your Taxes Work for You
This is a best practice for all small businesses, especially family-owned businesses, but we can’t stress it enough. Your personal and business finances must be separately utilized and tracked. Understanding where your revenue comes in and where it goes out is key to gaining a complete financial picture of your business and it’s vital to your survival during a recession.
Start now by learning about the best business accounts for your needs. This will streamline your bookkeeping process and make it far easier to file taxes or secure business loans, especially during times of economic hardship. It will also keep your family protected by adding a cushion between your personal finances and those of your business.
When facing a recession, filing taxes might be the last thing you want to think about. But it’s something that you certainly can’t overlook.
First, while tax cuts and incentives can certainly help, don’t rely on them to get your business through challenging times. Keep your records maintained and consult with an experienced CPA to ensure your business is taking advantage of all the tax benefits to which it is entitled. Consider looking at specific ways to maximize benefits for a family-owned business, like hiring your children. And second, be sure you fully understand the tax implications of the business entity you’ve formed, along with the pros and cons of pass-through entities.
Strategy #4: Take Control of Your Debt Now
Another big step you can take right now to recession-proof your business is to begin reducing your debt. When you don’t have to worry about paying off loans or credit cards, you’ll have more mental and financial capacity to tackle the daily operations that will keep your business afloat. First, understand how to manage your business credit card debt effectively and how it impacts your business in a struggling economy. It also helps to learn how your personal credit score affects your business credit, and how you can improve both.
Strategy #5: Analyze Your Marketing and Communication Efforts
In the midst of financial uncertainty, it’s tempting to take a bare-bones approach to operating your business. For many businesses, this means that marketing is the first cut to be made. However, slashing your marketing and communications budget can exacerbate the impact of a recession, leaving your customers waiting to hear from you, or worse, forgetting you exist. Joy Gedusa, the founder/CEO of PostcardMania, cautions against halting your marketing efforts in the midst of a recession. “Continuing your usual marketing outflow is vital to your business surviving a recession and thriving afterwards,” she says. “I learned this in 2008 when I cut my marketing following that recession, and it took years for my business to fully recover.”
Luckily, there are many ways to connect with your customers that don’t involve pricey advertising campaigns. Jeff Moriarty, marketing manager for Moriarty’s Gem Art, a family-owned business, says he looked to new strategies to engage with customers during the most recent recession. “We pivoted and started doing live streams through YouTube and Facebook. These live shows allow visitors to view our items, buy online and ask questions.” This communication tactic was so effective, Moriarty said the business has decided to continue, even as the economy recovers.
There are many other marketing strategies you can begin to implement right now that will see you through the current situation, and prepare you for a future recession, like leveraging social media or building your blog presence.
Ultimately, being flexible during a recession is important. “The best strategy in my opinion is to be flexible with your goals. Be open to sudden changes and have a contingency plan in place. Especially during these times of uncertainty, this kind of approach will pay off big time,” offers Ben Walker, CEO of Transcription Outsourcing.
There is no magic formula for keeping your business alive during a recession. And when you have a family business, the stakes seem even higher. But by using any period of stability to prepare, you can ensure your business has the best possible chances of overcoming financial hardship and living on for generations to come.