Themes for Family Businesses in 2023

Uncertainty and digitalization are among the challenges.

By Patricia M. Angus – Originally published in Trusts & Estates, December 2022

Will 2023 be the year that the pandemic is put behind us? Will the political and economic volatility that defined 2022 continue as the calendar is turned to a new year? As family business owners look ahead, what might they see on the horizon? Because family businesses represent the bulk of the gross domestic product around the world, this is a question not just for family businesses but all the communities they impact.

With the caveat that it’s of course impossible to make predictions, here are some thoughts on what themes might arise in 2023 for family business owners.

Uncertainty

It’s clear that most people, not just family business owners, are suffering from “crisis fatigue.” The pandemic was hard enough, but the fact that it’s been followed by rapidly rising prices and continued domestic and international conflicts has exacerbated an already uncertain environment. It’s not hard to understand why many individuals (including family business owners) seek some semblance of certainty for the year ahead. Unfortunately, 2023 is unlikely to be the year that things settle down. There’s just too much in flux right now. Politically, economically, socially—much will remain unresolved for the foreseeable future.

From a geopolitical standpoint, the battle between authoritarianism and democracy is being waged on every continent. In the United States, the reality of the Jan. 6 insurrection, with relatively minimal repercussions for the perpetrators, has exacerbated the polarization of the country. Expect fiery debates in Congress, with paralysis on the legislation front. All eyes will be on the 2024 election. Outside the United States, China will be battling with the after effects of its extreme COVID-19 lockdown approach, and political unrest may continue as Xi Jinping continues as its leader while the younger generation feels more comfortable expressing itself in public. Other countries will look like a game of chess as authoritarian leaders swap places back and forth with their democratically oriented counterparts. Post-Cold War assumptions of the United States as the standard bearer of democracy may continue to fade, as other countries look to the internecine battles within the United States as evidence that democracy is at risk.

Economically, recession will likely roil with varying impacts across the globe. But this recession may not look like any before it. Record corporate profits counterbalancing increasing prices may mystify economists and highlight the power of dominant players in various industries who can control pricing. The uncertainty will create great opportunities as well as risks for businesses, depending on which industry they’re in and the balances in their cash accounts. Family businesses, which have traditionally been more averse to carrying on debt, may start pouncing on opportunities and accelerate growth if/when the timing is right.

Socially, the great schisms across cultures and within countries will continue to grow. For family business owners, this may mean that they’ll need to pull out of doing business due to safety concerns in major cities and may present continued challenges in rural areas. Within families, the younger generation of family business owners are demanding that their voices be heard. The stakeholdership model may replace shareholder primacy as the de rigueur business model, in part as a result of the values shift across generations.

Digitalization

Businesses that haven’t fully integrated e-commerce and online experiences for customers and employees will be in a race to catch up to their competitors. The capital costs may be too much for some to bear, and consolidation through mergers and acquisitions may speed up. While increased scrutiny and enforcement of antitrust laws could put a dent in monopolistic practices in tech and other industries, it seems unlikely to happen fast enough to significantly change the great divide between the large players and their smaller counterparts; this will continue to put pressure on smaller businesses to carefully define their niches to stay competitive. In family-owned businesses, the next generation of owners will lead strategies that further integrate digitalization as a way of doing business, rather than as an add-on to existing practices.

“Business as Unusual”

As the clock turns to 2023, many businesses have yet to return to pre-pandemic ways of working. Some companies have declared that they don’t expect all employees to return to the office on a full-time (40-hour per week) basis. Many have embraced a hybrid solution, and others are getting more comfortable going “all virtual.” Industries where this isn’t feasible (think health care, grocery stores) will have to find other ways to attract and retain employees. It will take several more years for businesses to land on the “right mix” of in-person versus virtual workplaces and meetings. Family business owners should be on the lookout for legal issues that may arise from “work-at-home” set-ups. Where are liability lines drawn for activities that take place outside of the traditional office environment? The general counsel of a family-owned business should be reviewing its employee handbook to set proper expectations and mitigate potential exposure. In this “business as unusual” environment, the expectations of business, and its role in society, will continue to be debated.

Complex Family Enterprises

Many family-owned businesses have already evolved into “complex family enterprises,” expanding beyond the original operating business and adding a family office, joint investment vehicles and philanthropic ventures. These families will need new skills to govern new entities such as family offices and will need to determine whether they’re merely creating a private investment firm or a fully integrated wealth management firm serving its owning family. Family members will need new skills to oversee more complex relationships, legal structures and financial holdings. These complex family enterprises (such as the Walton family, owners of Walmart and founders of the Walton Family Foundation) will continue to control more and more of the country’s resources and wealth. They’ll likely become targets of social unrest if the great divide continues.

Tax Planning Frenzy

The estate, gift and generation-skipping transfer tax planning frenzy will continue. Each year, it seems, estate planners have a new reason to claim that “this is the last year” to set up structures to take advantage of tax rates that will rise in the upcoming election cycle. Despite the fact that there’s no sound evidence that the estate tax puts most family businesses at risk, intense lobbying against the so-called death tax will continue. There will be much emphasis on the upcoming 2024 elections, and once again, the number of trusts, limited liability companies and other tax reduction vehicles will be created at an exponential pace. Families that are still coming to terms with the last couple of rounds of trusts are already feeling overwhelmed and will increasingly ask for education and advice on how to live with these legal vehicles.

Divisions

Families that own businesses together will divide further into those families that are dedicated to learning how to work together through governance and facilitated discussions and those that don’t work together. It’s likely that the latter approach will lead to litigation within families and potentially unplanned sales of family businesses. The former group will develop family assemblies, constitutions and other family governance forums and mechanisms that will further tie family members together for generations to come. The latter will separate financially and emotionally. Both will continue to foster entrepreneurship in younger generations.

Transitions

By now, the long foretold “inter-generational wealth transfer” is fully underway. The transfers from Baby Boomers to their next generation family members have altered legal ownership (more businesses held in trust) and beneficial ownership (their children and grandchildren have beneficial ownership of assets at much younger ages than they did). Further, with family members living longer, relationships within families are changing fundamentally. The year 2023 will see more family businesses being owned jointly, in trust or otherwise, across generations. Leadership models will continue to evolve, with more women and joint leadership than in the past. This will require the governance approach discussed above, or families will risk uneasy transitions that can put family relationships and businesses at risk.

Global/Local

One phrase succinctly describes how “global” became “local” in 2022: supply chain. Business owners, managers and consumers experienced the disruption that can come from geopolitical strife and activity far across the world. With some governmental support, and a desire to reduce dependence on factors beyond borders, more businesses will seek to consolidate production and distribution rather than rely on sources beyond their control. This emphasis on “going local” will seem attractive on many levels, but costs, staffing and availability of resources will present new challenges. Despite the desire to “go local,” even the most local businesses now realize they’ve been impacted by Russia’s invasion of Ukraine, Brexit and China and will have to develop a global/local strategy to survive and compete in a disjointed, interconnected world.

Challenging Times

These are just some of the possible themes that 2023 might hold in store for family business owners. It would be nice to think that there’s smooth sailing ahead, especially after the exhausting past couple of years. Unfortunately, that’s unlikely. But as any good businessperson knows, and any family member can attest, sometimes the most challenging times can be the most interesting and rewarding. Onward!