Businesses are increasingly focusing on preparing for possible future issues. But many private businesses don’t have contingency plans for the loss of a significant shareholder. Liquidity is a vital tool for business owners looking to preserve everything they have worked for without compromising their families' financial security.
Disruption to a business can take many forms. It can be external such as sudden changes to the regulatory environment, a new entrant to the market or a large-scale event such as a global pandemic. Equally, though, the source can be internal. The loss of a significant shareholder or key decision-maker is a common example.
According to the latest KPMG Family Business Survey, 47% of respondents currently have a contingency plan in place should something unexpected happen to business leaders. This means a significant amount of family businesses are not actively prepared for a common form of business disruption.
The importance of having a plan
A lack of succession planning is still a common feature of the family business environment. While the number of respondents to the latest PwC Family Business Survey reporting to have one in place has doubled over the course of the pandemic – the total figure is currently only 30%. There are still widespread misconceptions about what the process involves, as this quote from a recent Deloitte publication states:
“Some may assume succession doesn’t cost anything if all they think it involves is handing over the keys. Yet in practice, moving a business into its next generation of ownership can impose high costs, some of which require significant liquidity.”
In some situations, losing a key person means that their beneficiaries gain a controlling stake in the business. This may be a major threat to the owner and everything they have worked for. In this situation, liquidity is crucial for business owners to remain in control.
Here are two examples that illustrate how this often works:
- Buy-sell agreement: business owners may need additional liquidity to buy back the business shares left behind by a deceased partner
- Keyman assurance: liquidity may be necessary to cover a key employee and protect the company in the event of their passing, as well as covering financial losses from business disruption and recruiting or training a successor
These examples show just how disruptive the loss of a significant shareholder can be and the potential damage these kinds of disputes can create. But they also show how a lack of liquidity can limit a business owners’ room for manoeuvre when faced with an unexpected challenge.
Generating liquidity. Powering self-determination.
Creating liquidity is an important way of reacting to events in a positive way, especially the loss of key stakeholders. It allows business owners to negotiate buy-sell agreements and bring stability to the business to ensure it continues to create enduring value for society, staff and shareholders. It also means that owners no longer need to juggle between the financial security of their families and the business. Creating liquidity allows owners to achieve both priorities.
So, as companies look to drive a period of increased growth as the disruption of Covid-19 begins to let up, generating liquidity should be a goal. A study by IBM shows 86% of executives now view cash-flow and liquidity management as a priority. On top of using sweep accounts and looking at accounts receivable and payable, what other factors should business owners be considering?
According to PwC, 82% of family businesses prioritise diversification and expanding into new markets as part of their risk management strategy. The pandemic was a test of business adaptability and agility, and many performed better than they originally thought. Diversification does present a risk but also an opportunity to create more income streams and offload unproductive assets.
Accelerated digital transformation has also been another central theme of the pandemic, with many businesses having to get up to speed with remote working fast. Digitalisation offers the opportunity to update paper-based ways of working previously, while IoT and automation are removing the need for human intervention from processes that have traditionally been manual. It also holds the potential for increasing efficiency and lowering operating costs after the initial investment and boosting revenue through increased productivity.
It seems likely that most companies will move to a hybrid working model for at least the short to medium term. This represents a good chance for business owners to reduce overheads such as rent and other property-related expenses to generate additional liquidity.
Always in control
Liquidity is one of the most important tools for business owners. It not only helps businesses to pay creditors, purchase the resources they need and continue to pay staff during periods of disruption but can help owners maintain control after the unexpected loss of a key stakeholder. Without it, businesses live on a thin and very precarious line where a sudden shock or period of stress could prove disastrous.
Liquidity helps business owners retain control of their business, effectively meet both their professional and personal priorities, and secure their families' financial security. It helps them operate with confidence, even when the unexpected occurs.
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