“In a crisis, be aware of the danger, but recognise the opportunity”: a timeless quote from John F. Kennedy that could not be any more relevant in today’s world. The economic, social, and political turmoil that we are now experiencing are testament to the fact that the COVID-19 pandemic has caused an international crisis.
But what constitutes a crisis for some has created a wave of unprecedented opportunity for others. Large privately-owned companies (often owned by families) have taken the opportunity to grow and maintain their value by throwing a lifeline to distressed assets. COVID-19 has created hurdles for mega financial institutions to offer easy credit to struggling businesses. In their place, private companies, family offices and serial entrepreneurs are increasingly undertaking higher-profile transactions.
The changing investment behaviour of private companies
According to figures from the Insolvency Service for England and Wales, in 2020 alone there were 12,557 underlying company insolvencies, with 1 in 342 companies being liquidated. Nevertheless, large private companies in the UK and beyond continued to use their capital to open doors for high-return investment opportunities that were once only accessible to institutional investors. Although private and family-owned businesses have long been known as cautious investors, recently they have adopted an increasingly entrepreneurial role, displaying opportunism by investing in ventures that are likely to recover in the post-COVID-19 world.
Family businesses are playing an increasingly important role in the economy, with new research by the IFB Research Foundation finding that 1 in 5 of the largest UK businesses are now family-owned. According to the report, the impact of family businesses on the economy has remained stable over the past decade, with many growing and thriving over generations. Yet simply having capital does not make a family business an attractive investor; there are several factors that must be considered before any business owner decides to sell to a family-owned institution, especially one with a low profile or an unknown track record.
What makes a family business an attractive investor?
The most important factor to consider is the family’s experience and knowledge in the field of the business seeking investment. Family offices require the necessary infrastructure, connections and strategies to bring about asset growth and an exponential return on investment. A FINTRX report found that families generally invested in similar industries to those in which they had made their initial wealth. Technology led the way, with tech-funded family offices committing 82% of their direct investments to technology companies. This was followed by real estate families, who made more than two-thirds of their investments in real estate. Such an approach creates a less risky investment, with the opportunity for vertical or horizontal integration with the family’s other assets.
The second factor, of increasing importance in today’s world, is the maintenance and resilience of the family’s reputation. In our dynamic and digitally-dominant economy, reputation management is about more than simply keeping the family’s name off the front pages of the newspapers. Today, family businesses must be prepared for the reputational risks that can result from online scrutiny and inaccurate information online. Such risks can manifest in numerous ways, including: inconsistent online data and proof points about the business; harmful legacy content from displeased employees posting on social media; theft and leaking of personal data; and negative media coverage of family members.
Unlike publicly-listed companies, family businesses tend to keep their affairs private and confidential – they are not bound by the law to communicate information that they do not consider relevant to the public. Such privacy must, however, be balanced against the market trend towards transparency and accountability, evident in the increasing negative scrutiny that high-net-worth individuals and family businesses receive from the media and the public. Perhaps the most notable examples of this are the news articles surrounding the Panama Papers, when the media targeted a number of high-net-worth individuals because of their offshore finances – proving that confidentiality over business or financial structures is no longer a safe bet against reputational risk and adverse media coverage. An increase in communication and transparency is now expected from family businesses, but this must be managed carefully to bring benefits.
The impact of technology on reputation
Although family-owned businesses may be aware of technology’s impact on the growth and sustainability of their company, they often fail to examine and understand the effects that digital disruption may have. The results that people see when they search for you and your company online have a growing influence on your success – regardless of your brand, size, or sector. The first page of Google search results for a company or individual’s name attracts 95% of traffic (clicks) from an average search, with 90% of people looking no further than the first page of search engine results to form their impression of you. What appears on that first page can be vitally important to your reputation.
For family business owners, chief executives and founders, digital identity is as valuable as any other company asset and must be protected with the same importance. Doing so can lead to higher trust, an increased interest in business transactions, and the ability to attract better employees. Engaging specialist company advisers (including communications, legal and cyber experts) is integral to the evolution of any family businesses, dramatically reducing the costs of responding to a crisis when it hits, as well as preserving the perception of the business’s integrity and judgement.
Specialist advisers can also protect a business or individual’s reputation on an ongoing basis, enhancing their online brand narrative and strengthening their digital resilience to help them survive and thrive in the long run. Advisers can identify and displace unwarranted digital information in search engine results, and help businesses distinguish themselves from their competitors by improving their brand visibility, positioning and transparency for relevant stakeholders.
An increase in communication, transparency, efficiency in managing inter-family relationships, and the digitisation of the business can all enhance the value and positioning of a family business and attract potential opportunities for growth. Now more than ever, financial analysts are paying close attention to online reputation and realising the value of companies that proactively protect themselves from hostile digital attack.