thestepproject home.kpmg/privateenterprise Mastering a comeback March 2021 How family businesses are triumphing over COVID-19 Global family business report: COVID-19 editionTable of contents 01 56 02 Mastering a comeback Editorial board Executive summary 08 The impact of COVID-19 on family businesses globally 12 From impact to action 18 Absorbing the financial shock of COVID-19 10 Sector and regional impact 20 Putting purpose and values to work 24 Three key strategies: Preparing for a comeback 33 Four family business personas 38 The Family Consortium 32 Making the strategy choice: T wo key factors 50 Methodology 52 55 55 55 Acknowledgements About the Successful T ransgenerational Entrepreneurship Practices (STEP) Project Global Consortium About the KPMG Private Enterprise Global Center of Excellence for Family Business About KPMG Private Enterprise 34 The Family Corporation 42 The Family Enterprise 46 The Family V enture 48 One size does not fit all 2021 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reservedMastering a comeback T here is a widely accepted view that family businesses have mastered the art of resilience, agility and adaptability to overcome whatever challenges may come their way. With this in mind, and for the benet of all family businesses, we wanted to capture the valuable insights and important lessons learned by family business leaders throughout the world in guiding their businesses through the uncertainties of COVID-19. How has COVID-19 affected their businesses and their families? What actions have they taken to preserve, adapt and potentially even grow their businesses in such an uncertain environment? Does resilience and agility continue to be a unique family business advantage? The Successful Transgenerational Entrepreneurship Practices (STEP) Project Global Consortium and KPMG Private Enterprise came together to nd the answers to these questions and many more by conducting a special Global family business survey: COVID-19 edition. The survey data was collected between June 2020 and October 2020 and it captured the experiences and insights of family businesses of all sizes and from a vast range of industry sectors around the globe. The strategic alliance between the STEP Project Global Consortium and KPMG Private Enterprise allows us to share valuable insights into the key issues and opportunities that are affecting family businesses. STEP has successfully bridged family business research and practice for the past 15 years and both organizations have deep experience in working with business families around the world. This has given us the opportunity to develop a deeper understanding of some of the most pressing questions that are on the minds of family business leaders. Understanding the impact of COVID-19 and the actions that family businesses have taken in response is just such an opportunity. As expected, the insights that we have taken away are instructive for family rms of all sizes, sectors and operating models. We are pleased to have this opportunity to share with you the ways in which family businesses around the world are triumphing over one of the most signicant and unexpected events in their families histories. Throughout this document We/Us/Our means KPMG and the Successful Transgenerational Entrepreneurship Practices (STEP) Project Global Consortium. Andrea Calabr STEP Global Academic Director, Director, IPAG Entrepreneurship North America, South America Asia Pacic; and the Middle East engineering rms that began producing medical ventilators; technology providers delivering free mobile phones to vulnerable members of society; comedy clubs hosting virtual events for struggling charitable organizations; and airlines offering eets for humanitarian missions. The common thread that resonates across these stories is the creation of a legacy. As a leader of a prominent Irish family business commented, “Our family business is in its seventh generation. During the Great Famine (Ireland) of 1845, our business took on a role very similar to that of the Red Cross, distributing food to the sick and needy. We have been through world wars, civil war and times of immense economic hardship. The learnings from these experiences reect the values we hold as a family, and I want my children to remember me and my team for what we did for our communities during a time of need” . Eric Clinton Associate Professor of Entrepreneurship, Director DCU National Centre for Family Business Navigating a legacy during the storm of a pandemic 2021 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 27 Mastering a comebackWhile continuing to sustain the familys purpose, values and community commitments they began turning their attention to new strategies for pivoting their business by reacting initially to the impact on their business (especially with regard to the impact on their revenue) in order to survive, followed by a proactive pivot to create new approaches for adapting and transforming their businesses in order to thrive in the future. Business transformation is the second observed strategic response from family businesses. It embraces the concept of pivoting and the importance of encouraging a transgenerational entrepreneurship mindset so that the business can be passed successfully from one generation to another. Actions such as streamlining their operations and implementing new nancial measures, and creating new products, exploring new markets or adopting new technology solutions were taken to transform their businesses. These may have been changes that the business had contemplated in the past, but in responding to the impact of COVID-19, the family may have determined that the time to pivot was right in front of them. In some cases, a slowdown in the companys regular operations or the pressing need to nd new sources of revenue has provided a window that was needed to open for the business to explore new ideas. Family members from multiple generations spent more time together due to necessary lockdowns which helped them nurture the transgenerational entrepreneurial mindset that is the fuel for innovation. Putting the knowledge and skills of several generations to work made them 45 percent more likely to accelerate opportunities to develop and implement well-planned new ideas as part of the immediate recovery plan and for the companys future growth prospects. This included, strengthening their commitment to, and expansion of, their rms ESG goals, which is recognized as a particularly high priority among next- generation family members. Many family businesses were quick to adopt new technology processes that completely transformed the efciency of their operations. Others have tapped into their familys entrepreneurial mindset to diversify their businesses by creating a new catalog of digital products and technology services that opened up entirely new markets that werent even imagined a few months earlier. Strategy 2: Business transformation One forward-looking outcome of the pandemic is the stimulus that it has created for family businesses to understand the value of advanced digital technology for their operations and their growth. Many are now seeing the potential for utilizing managed services, for example, to make their operations more efcient and trim expenses. As a new business opportunity, the appetite for digital technology applications has advanced quickly. Many family businesses are already well underway with the introduction of innovative technologies to meet the needs of entirely new market segments that are only beginning to emerge. Jonathan Lavender Global Head, KPMG Private Enterprise, Partner, KPMG in Israel 2021 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 28 Putting purpose and values to workI have observed that family businesses are beginning to transform their businesses for what lies ahead. The focus that I see right now is one of diversification not away from the core business, but into new areas that are no longer dependent on one or two sectors or income streams. They are exploring a wider range of markets and making sure that their products are relevant in the new reality. Families have also recognized that they need to diversify their wealth while sustaining and growing the family business. I have seen several situations in which the family has made the decision not to pay dividends in order to retain their employees jobs. However, many of those same family members have now realized that they rely on those dividends and that they also need to diversify their wealth in case an unexpected event arises again. With the familys wealth residing in one family business basket, they recognize that they need to consider investing a portion of their money offshore or in alternative investments or in new businesses. The voices of younger generations are playing a larger role in identifying issues such as this and recommending solutions with far more open discussions and views than might have been encouraged in the past. Alan Barr National Private Enterprise Leader, Partner, KPMG in South Africa Diversifying the business and family assets 2021 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 29 Mastering a comeback3 Strategy 3: Exercising patience The third strategy is one in which family businesses have not taken immediate action to address the impact of COVID-19. This strategy was common in very large family businesses that have the nancial resources to withstand major changes and challenges to their operations in the short term. We saw from the survey that a patient approach was taken at various stages in the pandemic life cycle as family businesses assessed the longer-term impact of COVID-19 and were able to take the time to project a realistic outlook for the future. They have been able to leverage their patient capital to observe the impact and actions of other companies in the same industry that dont have the familys unique set of resources, which may give family businesses a future competitive advantage in their industry. There is an interesting aspect to this strategy among family businesses that were particularly concerned about retaining and taking care of their employees. In many of these companies, for example, a decision was made to defer dividend payments for up to 12 months in order to retain the capital for their workforce. This has generated tremendous goodwill among employees who recognized the level of concern and care that the shareholders have for their employees welfare. The need for speed In my experience, the level of concentration of family ownership has a great deal of inuence on the strategies and actions that are taken in the business. In a listed company, for example, even if the CEO is a family member, he or she still has to take compliance matters into account and follow prescribed procedures for making decisions on behalf of both the family and non-family shareholders before taking a particular action. For family business, whether the CEO is a family or non-family executive is less important. What matters in these cases is whether or not the family has to go through a lot of evaluation to determine if their decisions achieve the familys purpose. The more dispersed the family ownership, the more time it takes for thorough communications and open discussions before decisions can be made. As a result, the speedy decision-making that family businesses are generally known for may be lost in the process. Karmen Y eung National Private Enterprise Leader, Partner, KPMG China 2021 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. Putting purpose and values to work 30Preferred regional strategies We found interesting regional differences in the choice of one or more of these three strategies. In the Middle East to wait and see how the impact of the pandemic would evolve over a period of time. However, it is important to highlight that the second-most important strategy for this group was to begin transforming their businesses after they had taken sufcient time to assess the situation and their options. The story of a Family Venture The business represented in our example of the Family Venture persona is a 25-year-old construction company in the Middle East. It is a small, conservatively- managed operation that is overseen by the rst-generation founder, with minority shares owned by his son and one of the founders sisters. The company has 16 full-time employees and the majority of the rms work is performed by sub-contractors. With tight control on the management and ownership of the rm, the company took a cautious approach initially as it faced what it hoped would be temporary work delays (and an inconsistent revenue stream) as a consequence of the pandemic. The few short-term actions that were taken primarily affected the companys employees. Five were furloughed and the hours for the remainder were cut in half. While the business is relatively small, the connections outside the family are expansive due to the number of sub- contractors and suppliers with whom the company works on an ongoing basis. For a small company such as this, maintaining those strong relationships and connections is vital. While waiting patiently to determine what the longer-term impact of the pandemic might be, the family focused its energy on maintaining these crucial external connections. There were few additional areas where expense cuts could be made, and it soon began to appear that things might need to change to avoid difcult decisions. Recognizing this, the founder and CEO put the familys human capital resources to work to begin identifying ways to modify the business for a different future. Because the business initially took a “wait and see” response to the pandemic, the familys early focus was on the importance of maintaining candid and frequent communication within the family and among employees, sub-contractors, customers and suppliers until the long- term outlook became clearer. When it appeared that a different path forward would be required for the survival of the business, tough decisions had to be made as the CEO and his family recognized that the time to revamp at least some parts of the family business had arrived. By leveraging their patient capital in the early months of the pandemic, they were able to understand the full impact of COVID-19 on their industry and the immediate actions that many of their competitors were required to take. With their ability to weather the initial storm, the