Family Businesses in the Wake of the COVID-19 Outbreak

By March 27, 2020 May 19th, 2020 COVID-19 Insights
Family Businesses in the Wake of the COVID-19 Outbreak

While large companies like Apple, Macy’s and Nike have closed their stores nationwide, they can likely survive without sales for weeks on end. The same cannot be said for small businesses. Rather the temporary shutdowns and other measures governments are taking to slow the spread of the coronavirus are wreaking havoc on small businesses and putting millions of jobs as risk.

This is devastating, as the latest data from the U.S. Small Business Administration (SBA) revealed that more than 30 million businesses with payrolls of 500 or less actually employ roughly 59.5 million people.

Among the hardest hit businesses are the mom-and-pop stores, often cited as the engine of the economy. Family businesses account for over 64% of the U.S. gross domestic product (GDP) and 62% of the country’s employment.

With so much at stake in these unprecedented and uncertain times, family business owners must focus on protecting the value of the family enterprise while simultaneously looking out for the well-being of employees and stakeholders.

So what can be done right now?

Already operating with tighter cash flows and cash reserves, it is vital to implement sound and insightful business strategies. Here are some actions you may consider for the immediate future:

1. Evaluate your cash position

Cash remains the biggest component of any business. Therefore, achieving an immediate handle on your daily cash needs is essential. Now is the time to critically assess your operations, review existing cash flow procedures and understand how potential disruptions to your operations may affect liquidity.

As the economy remains volatile and slow amidst the COVID-19 outbreak, businesses must understand their cash position and working capital needs. This is especially critical if there is a need to recapitalize the business.

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Performing and having access to a detailed cash-flow analysis will help you answer key-planning questions, including:

  • How far can our current cash flow position extend ongoing operations?
  • How do we triage expenses?
  • When may we need to implement changes to our workforce?
  • Do we need to manage our non-essential suppliers differently?
  • When do we approach our bank for debt leniency?
  • When do we discuss flexibility with our landlord?
  • When do we approach our investors for more capital?
  • When do we apply for government assistance?

By critically assessing your operations, you can predict how disruptions may affect cash and liquidity moving forward. It will also provide greater insight as to future adjustments you may need to implement.

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2. Consider business model adjustments

As revenue generation remains unpredictable during this uncertain time, cash flow projections may guide you to make adjustments to your business model as a means to ensure financial viability during and after the crisis.

Some of these actions will be short-term and taken to align cash outflows with cash inflows. Short-term actions may include:

  • Reduction of variable costs – review and determine what costs you need to actually run your business;
  • Spending freezes – this is the time to rethink any capital investments, contract labor, and more;
  • Supplier terms negotiations – communicate with your supplier to negotiate the best terms for your business;
  • Lender negotiations – communicate early and often with your lenders, they may end up as your fastest source of additional liquidity;
  • Landlord negotiations – determine when it is time to work out a deal with your landlord;
  • Temporary workforce reductions – if your scenario planning leads you toward layoffs, make sure you handle them compassionately and legally;
  • Customer credits and discounts – consider what your customers are going through right now as well, what options are available that benefit both parties.

Aligning your business model to reduce cost, mitigate risk and improve efficiencies to better reflect the marketplace will improve the likelihood of financially surviving this situation and preserving the value of the family business.

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3. Review your market strategies

Market uncertainty, government-mandated shutdowns and travel bans have decreased demand for many goods and services across industries. The situation is further complicated by the disruptions in supply chains due to social distancing and quarantine measures. Therefore, the speed and extent of demand recovery is unknown at the moment, as it is reliant on a multitude of factors.

With so much uncertainty in the marketplace, every business, including family-owned businesses, should revisit their current market strategies. Most companies have built their plans on assumptions that included sustained economic growth, availability of capital, tight labor markets and other consistent market factors. These assumptions, though, are no longer useful.

Since nobody can predict what will happen next, we recommend developing a few strategic scenarios based upon what could happen in the economy going forward. A set of key criteria should define each scenario.

The criteria should include revenue, profitability, cash flow, cash balance, utilization thresholds, access to credit/capital, market-related restrictions or relaxations, general economic environment, material changes to supply chains, distribution channels, customers and demand, availability and capacity of human capital. You should also define triggers for each strategy. Then, your scenarios should be implemented when key assumptions are triggered.

Family business leadership must address defining the assumption set, developing potential scenarios, and revising the strategy quickly and thoughtfully.

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4. Consider government assistance

Government assistance may not be the end-all solution, but it is available. The SBA offers disaster loans specifically for the coronavirus pandemic. Their loans are as much as $2 million per applicant at 3.75% interest.

In addition, as a means to complement the SBA program, the Federal Reserve announced new initiatives, including the establishment of a Main Street Business Lending Program to support lending to small and medium-sized businesses. On top of that, there is also the stimulus bill. As agreed upon, the federal government is preparing over $350 billion in relief for small businesses, with some stipulations.

On a smaller scale, some states do have emergency funds.

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5. Lead with intention and compassion

With uncertainty and uneasiness permeating into most aspects of our daily lives, the best asset you can be to your company right now is a leader. This crisis demands leadership, attention to the emotional needs of the family and employees as well as a well-vetted and dynamic financial/business sustainability plan.

We encourage you to lead with authenticity. As fears of the unknown drive anxiety, it is your responsibility to reassure those around you, including employees, stakeholders and family. Authentic leaders will help manage the emotional rollercoaster and provide hope for the future.

It is also important to make thoughtful decisions that are consistent with the family business values. But you must take action expeditiously. Making thoughtful, but expeditious decisions goes a long way to instill a sense of confidence, hope and safety in your employees.

Furthermore, in times of crisis, it is equally important to relay three key ideas to your employees, family members and other stakeholders: 1) what you know, 2) what you don’t know, and 3) when you intend to provide new information. In addition to conveying much-needed information, communicating often and honestly will help motivate employees and stakeholders. Telling people what you don’t know helps build trust and credibility.

Finally, it’s a set of foundational values that often drives family businesses. These values are then communicated to employees, stakeholders and even the community. During a crisis, family businesses should maintain and exemplify these deeply-rooted values.

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How can Squar Milner help?

No matter the industry and regardless of your business size, we want to help. Our team recognizes the importance of small companies and family-operated businesses and we want to do our part to make sure you make it through this crisis with your business still intact.

We are working diligently to stay up-to-date on tax implications, deadline changes, stimulus packages and more so that we can offer our best advice to help you succeed. If you want to connect, ask questions, or see how we can specifically assist your business at this time, please get in touch.

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Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

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