Getting Back to Business – “Business Owners – Start Your Engines”

Not today, not this week, likely not next week, but soon your business will be asked to participate in the greatest race to restart an economy in history. In an Indianapolis 500 car-race that’s been red-flagged due to an extraordinary large crash, a restart with a green flag occurs and all drivers accelerate at the same time to hit previous top speeds of over 200 mph in the first restarted lap – such a restart is most assuredly not going to occur with our economy, of course with several exceptions. How long will it take most businesses to reach top speed, what will the new top speed be, what speed will you and your customers be at the finish line, and has the finish line been changed? 

Consequently, how will you be prepared to financially, emotionally, intellectually, resourcefully, and most importantly, carefully re-enter the race? Have you thought about what is involved, what speed limit you must be in, will your engine have governors, and what can you expect? What plans do you have and how flexible are those plans to drive around detours? Remember – a race does not need to be finished at top speed – so said the tortoise – it’s more important to cross the finish line.

The Federal government has declared this a war and compared this to a military operation; its leadership will gather on April 14 to start planning an exit strategy from this war — be cautious as all generals state that nothing goes as planned in a war setting. So, expect the unexpected and can you handle that?

Below contains more questions you must ask yourself, matters you should consider, and some cautionary tips.

Questions to ask yourself and watch out for

  • If parts of your facilities were closed, what startup maintenance is needed for machinery, cleaning premises, accessing common areas and is sterilization needed or wise?
  • How much advance notice should you provide for your staff to come back to the premises? Is a staggered staff return more optimal? Can you alter how you do business to help create or work within what might be the new normal? How will returning staff that commute via mass transit be affected? 
  • If you had any infected staff, particularly key people, how will their functions be covered? For valued staff that continued to work remotely, are bonuses in order?
  • How long do you anticipate that it will take for demand for your products to normalize? What is the minimum demand or speed limit needed to break even or get run off the road? What do your competitors think? Have you contacted your customers to anticipate their orders so you could better gauge demand? Has demand for your product changed, perhaps, permanently?
  • If you depend upon a supply chain for purchases, have you contacted those producers and carriers to better understand their plans and needs? What inventory levels do you plan for?
  • Have you determined how you will fund this re-start time as receivables take time to build and then collect? Do you need to alter initial sales for larger discounts to create more demand or quick-pays to accelerate cash flow? Do you need to alter your pricing no matter what?  What are your suppliers doing? How will you monitor customers credit as experience shows that client credit can deteriorate rather quickly?
  • Do you need to advertise your reopening? Do you need to create traffic with sales? Does merchandise require a sanitizing?
  • Are third party providers important to your business also planning to reopen at the same time as you? Can they service your needs initially? Have similar plans been made for back-office operations?
  • If you have received (or will receive) a forgivable loan under the CARES Act, have you developed a plan of utilization of the funds to ensure you are able to meet the forgiveness criteria? Is your plan flexible enough to reduce costs but still comply with forgiveness if demand is lower than anticipated? Can you afford a plan of salary cuts and non-forgiveness?
  • What if the restart of the United States economy, now presumably geared for April 30, is accelerated or, worse – delayed? What plans will you have in place if after opening, one of your employees’ contracts COVID-19? What if you are advised that some of your recent customers have it? 
  • Have you prepared a flexible but realistic financial stress test (i.e., granular cash flow needs for at least six months)? Do you plan on updating this stress test frequently and quickly? Do you need to create and update a business model beyond that time? If your business needs funds and it must come from equity, have your personal assets been safeguarded and can they be drawn upon? If trustees are involved, should you start those discussions now as that, at times, they can be time-consuming and painful?
  • There are various conceptual discussions now about mandatory blood testing on returning staff, certificates for those containing antibodies, etc. How will you be current and stay current on CDC and other government guidelines on distancing in businesses, employee rights, customer infections, new rules, and just plain suggestions, etc.?

Things to Consider

  • Watch for a preponderance of business failures so limit deposits or prepayments of goods to suppliers; monitor quality of merchandise coming in to see if inferior materials are being used.
  • Contact insurance carriers prior to restarting to determine how and if insurance policies can be changed for some protection against being sued by parties contacting the virus via your premises whether it be employees or customers or any other visitor – we understand some suits have been filed. Of course, revisit your business interruption and other coverages at the same time.
  • As energy costs are low, is it time to purchase long term contracts locking in these low prices? Care should be taken as many of these contracts are generally actual purchase commitments; so, if your demand is lower than anticipated, the energy costs still must be paid for. Also, be careful of the financial status of these providers – many businesses with prior good names which have been weakened, enter into these derivative type contracts to receive cash flow, and cannot execute. This was how ENRON commenced its dishonest activities. 
  • Replace or reduce pre-existing debt that is restricting, expensive and/or contains personal guarantees with these CARE Act forgiveness loans even if it is doubtful you will meet the forgiveness criteria. In other words, you can replace expensive recourse loans for cheaper non-recourse loans.
  • Bank debt:
    • Under many circumstances, banks have been given the green light to offer a three-month forbearance of debt service whereby the governing banking regulatory boards (e.g., FDIC) will not penalize banks for accommodating customers and will waive Troubled Debt Restructuring treatments to lenders (thus, relaxing fines and not reducing the bank’s reserves which allows them to continue to lend as if these loans are well-performing). The FDIC directive states “…a financial institution may modify or restructure a borrower’s debt obligation due to temporary hardships resulting from COVID-19 related issues…”. Certain states have a list published as to which banks have signed on formally (New Jersey is one).
    • Just April 9, the Fed announced a multi-trillion-dollar plan (details not yet known) to buy some private company debt, municipal bonds and more. Inquire about debt relief, renegotiate bank terms, expand available borrowing base, etc.
    • Some banks have still not determined how those three months of debt service forbearance will be treated afterwards. Consequently, obtain a clear understanding as to how any debt benefit obtained will be handled in the future and backend.
    • Be wise in securing interest rate protection as rates are artificially low and could skyrocket as the national deficit is rising quickly, the dollar is strong, and tensions with China continue – these are three of several issues that may (or may not) translate into higher interest rates. However, swap arrangements could be costly so understand new terms carefully.
  • Inquire about rent relief from landlords. Follow local government programs on their programs. Some debt lenders are matching tenants’ and their landlords’ debt forbearance programs with a coordinated rent/borrowers relief program. 
  • Landlords, particularly commercial operations, will have an increase in supply on hand and many will need to make deals for new space, extensions, etc. In 2021, prior to COVID-19, it was projected to have an abundance of supply of commercial space in the New York area already.
  • Certain businesses could not be productive in this shutdown period as they required some construction to continue or to retrofit. Consequently, if you require some construction to occur to restart your business, be aware that even with a decrease in economic global demand at hand, there could be a near term construction crunch particularly with the anticipated government next phase economic stimulus package that will target infrastructure. Be careful whom you hire to perform this construction as many out of work non-construction individuals will take on these projects and do not have the same skills, knowledge of building codes and have falsified insurance certificates.
  • If you have been very successful in maintaining or increasing sales, what plans do you have in retrofitting production if such higher demand is permanent? What are your competitors doing about this? How confident are you that demand will stay high for these products and have you factored in a potential dip of demand because of hoarders once the crisis abates.
  • Take advantage of conditions by looking at acquisitions for lower prices, upgrading staff from a larger available unemployed workforce, 

In summary, watch for new grants or programs helping you to restart your engines. If you were not before, become a well-oiled machine to eliminate friction and costs. However, watch out for scammers as they always arise in a crisis. 

By Eric Lerner, CPA, Director of Quality Control
April 13, 2020

If you would like additional information please contact your Gettry Marcus Advisor or Eric Lerner, the author of this article.