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It Is Coming And, It’s Not Pretty

It Is Coming And It's Not PrettyEconomically speaking, this is just the beginning.  Coronavirus may flare up and die down cyclically until a vaccine is discovered.  Our economy is now unfortunately destined to limp along for the next few years.

How to Survive

For businesses to survive post coronavirus, they must have a sustainable model that accounts for new changes in our social behavior and the economy.  For example, a restaurant required to operate at 50% of its former revenue level may actually lose less money if it were closed. It is critical at this time that businesses understand what exactly their break-even revenues are.  In other words, how much business does a company have to do just to break even?  Now is not the time to manage a business by shooting from the hip.  In fact, if there was ever a time to have absolutely all of your ducks in a row this is it.  Once you understand what your business’s breakeven revenue level is, you need to design a plan to meet or exceed that level.  If you are unable to do that, then it might be a good time to consider selling the business while you can.

You should use a 13-week cash flow model to project your sources and uses of cash to ensure you will have the liquidity to continue forward.  Financial management is key now.  This is not a time to struggle with poor product quality or customer service.  You need to not only be at the top of your game, you need to be at the top of the game.  Your team needs to understand what the company’s new goals are and how you intend to meet them.  Of course, your customers also will need to feel safe and comfortable during all staff or product interactions.  This means you need to apply best practices for sanitation and safety, and you need to sing it from the mountain tops.  This is now a big selling point.

Some Will Fail

As we struggle to stay healthy and businesses try to do the same, both our behavior and their business models are subject to change.  Some forms of social distancing will continue to become the norm, at the very minimum until a vaccine is released.  After the economy reopens, certain businesses will experience a fall in demand.  For some this reduced demand may prove fatal.  Certainly, many industries will experience a shakeout which will lead to some closings and some acquisitions by private equity funds and other types of investors looking for under-valued acquisition opportunities.  Think about hotels and movie theaters as examples.  Some may seek protection in bankruptcy.  The new Chapter 11, Subchapter V makes it much easier for a small business to file and pay for a bankruptcy proceeding.  Personally, I am not a huge fan of bankruptcy and think out of court restructurings are much less destructive for all parties.  Nonetheless, I expect to see bankruptcies up by as much as 25% by the end of the year.  As unemployment has spiked, consumer spending has slowed dramatically, and savings rates have increased.  While this relationship makes sense, it is the last thing our economy needs right now.  We need more spending to stimulate the economy.  Many of the people on Unemployment insurance are making more than they were before.  They may not be motivated to return to work much before the third quarter when national unemployment benefits are reduced. 

Business valuations are suffering as well.  EBITDA sales multiples are likely to decrease, and cap rates are likely to rise because of falling earnings and skittish investors.  As I have already mentioned, there are most certainly investors looking to pick up bargains in struggling sectors.

Even the government is not immune (forgive the pun).  Financial pressure will now be back on local, state, and the federal government who have just recently recovered from the Great Recession.  These entities rely primarily on tax collections for funding.  As earnings for out of work individuals, small businesses and public companies decline, so will their tax payments.

Although many parts of the economy are struggling, it is important to remember that many companies, and industries for that matter, have seen a real surge in demand during recent weeks.  No doubt they will continue to flourish as we continue to modify our behavior, perhaps some of it permanently.

No Snap-back

What all this means is that just as in the Great Recession, our economy will not snap back as so many have predicted.  For many businesses it may be reasonable to expect a three-year period of limping along with little profit to show, trying and hoping to get back to normal.

Even if a vaccine for COVID-19 is developed by year-end, the damage will have already been done.  Most companies have not easily sustained the massive loss of earnings this microscopic virus has caused them.  Receivables (the cash-flow life blood of a business) will have been long collected and spent.  For many it will be like starting from scratch again.  For some who borrowed PPP loans from the SBA, with a specific financial structure of high payroll and low fixed cost, those loans could be forgiven and prove to be a lifesaver.  For others who borrowed PPP money and whose businesses are forbidden from reopening by a governors’ order; they just took on more debt with an aggressive repayment schedule and with no cash flow during the initial covered period of the loan.

It is not pretty.  But if you are prepared and manage according to a well-thought out plan, chances are you will make it.  So, get to it.

Kevin M. Burke, CTP

Burke Advisory Services

May 19, 2020

Kevin Burke is a member of the Turnaround Management Association and a Certified Turnaround Professional.  A graduate of the Villanova School of Business, he has over 35 years of experience in banking and executive management.  His management consulting practice is located in Troy, Michigan.