April 10, 2020
Considering that the crisis related to COVID-19 represents, first and foremost, a global health emergency, businesses whose primary assets are their people are being heavily impacted. Companies operating in the B2B services industry are profoundly affected by the fear and uncertainty within their workforces and customer bases.
The lack of (i) information and (ii) a definitive timeframe for this crisis to run its course may be the largest impediments as you attempt to cultivate an internal culture of calm and lay out a proactive action plan to navigate your company through the days, weeks, and months ahead.
While the COVID-19 pandemic is a unique situation, we have successfully traversed times of deep uncertainty with our clients before. In addition, we have gained valuable insights from recent conversations with founders, owners, and investors in your sector, and we are happy to share them with you in the event that you may find some of these perspectives helpful.
Many businesses within the B2B services space rely heavily on project-based work with finite durations. Our clients are reporting that a number of their customers have decided to postpone the launch of non-essential projects due to uncertainty around revenue and a desire to preserve cash. None of us know how long this break in kicking-off certain new projects may last, but it is undoubtedly an area of concern for many business owners. Cautiousness abounds.
On the other hand, many firms are being presented with new opportunities as client needs evolve to a new work environment during this time of extreme social distancing. As workforces have mostly moved to work-from-home, new mission-critical projects centered on facilitating secure remote access to applications and information are being accelerated.
Those who may have been in the middle of a long-duration BI project, for example, are now being asked to pivot and instead ready their client’s IT infrastructure to support a prolonged period of remote work.
Companies who were planning to implement cloud enhancements or migrations have moved up their target completion dates, as they must urgently address the security and accessibility functionalities that enable the off-premise activities of their workforces.
Although firms with managed services relationships are not as worried about delivering revenue in the near-term, they are under intense pressure to support the rapidly increasing needs of their clients, all while their employees are concerned about their well-being and juggling the challenges of working from home.
Among the first concerns of business owners during this pandemic are the wellness of employees and clients, as well as the continuity of business activities. Beyond that, cash concerns are top-of-mind.
If you are not sitting on robust reserves, be prepared for a working capital crunch as your clients stretch their payables to you. Keeping open communication lines with lenders and customers will set you up to leverage available resources as needed. We are seeing that banks are surprisingly flexible and willing to help in this environment. The last thing the bank wants is to push their customers to the brink.
Companies at risk of breaching loan covenants should seek to “amend and extend,” to borrow a phrase popularized during the global financial crisis over a decade ago. As our CEO Michael Butler mentioned in his review of how business owners can lead their organizations through this crisis, executives should assess covenant compliance under a variety of downside scenarios to understand where the risks lie. Even with the recent disruption, debt is still cheap on a relative basis.
Keep in mind that banks are experiencing pressure to support their clients and keep businesses afloat. As interest rates continue to fall, you may have the opportunity to access more cost-effective capital, so this could be a good time to consider restructuring term debt to optimize cash flow.
If you are well-capitalized and have the financial wherewithal, you might consider offering clients the opportunity to extend payment terms by 30 to 60 days. Now is the time to demonstrate goodwill to your clients and work to meet their evolving needs.
Your clients’ problems today are likely vastly different than they were just a month ago—at the very least their priorities have rapidly shifted. Think about what they are facing now and focus your efforts on solving those challenges. You can create an enduring, trusted advisor relationship by offering your time and expertise as they navigate this period of uncertainty.
A significant proportion of the professional services workforce is comprised of contractors. As activity slows down, they may experience prolonged periods of unemployment or underemployment.
Founders and owners should consider the ways they can afford to support these workers during this period of uncertainty. If you are able to extend an act of generosity during this time, it will go a long way in building loyalty with your contingent workforce.
Those who are not able to offer economic assistance would be well-served to prioritize an empathetic response—being as transparent and communicative as possible to maintain or further develop trust among workers. As an example, you might consider sharing certain information about the company’s financial situation with your employees. If company leaders are making financial sacrifices so that the workforce can be compensated at more normal levels, share that information with your team as well.
Most painfully, if layoffs or furloughs are necessary, aim to provide as much relief as is financially viable, be compassionate in your communications strategy, and keep the human element at the forefront. As projects come back online and activity normalizes, workers will remember your response and reward you.
Our clients and contacts are approaching M&A activity with caution during this time. Some have elected to pause their processes to allow the dust to settle before moving forward with a transaction.
Founders and entrepreneurs who were previously looking to opportunistically time the market for a sale are now reconsidering their timing in light of the current backdrop.
The stock prices of publicly traded strategic buyers have taken a major hit, and they are managing toward reduced earnings expectations. The larger, privately held partnerships and employee-owned firms are in the same boat—triaging their core businesses is the main focus. Topline pressure is the topic consuming board discussions, so M&A will not be a priority in the near-term.
Our contacts within the private equity community are universally centering their attention on their own portfolios. They are developing business continuity plans, measuring impact, and ensuring the health and safety of their employees. Once those are addressed, potentially within the next four to six weeks, PE firms have indicated that they will be looking for opportunities.
There is significant capital available, and history has shown that market disruption creates excellent investment opportunities. They are on the lookout for healthy companies with strong management teams and are willing to support those firms that are poised to perform well as we transition out of this period of uncertainty. We are aware of financial sponsors who have relaxed their historical requirements mandating only control investments to allow for significant minority investments supporting growth businesses.
All the while, father time is not slowing down despite volatility in the markets. Owners nearing retirement age should probably accelerate their decision-making around succession planning given the uncertainty. Owners may consider using this time to bolster their existing leadership teams with an eye toward readying their businesses for an eventual transaction.
One of the most interesting dynamics that we’ve noted among savvy business owners is—when market dynamics lead you to conclude that you’re not a seller, you should probably be a buyer. Given the downward move in public market valuations, a previously pricey opportunity could now become viable. Exploring dialogue with potential acquisition targets could allow you to capture market share in anticipation of an eventual normalization of business activity.
As the COVID-19 situation unfolds, please consider us as a resource to discuss how the critical business decisions you are making today may impact your future financing and exit options.
Our best advice is to remain flexible, calm, and proactive. Getting out in front of issues, over-communicating with stakeholders and being ready to change course as circumstances require will allow you to come through this period in a position of strength.
Our team is available should you be interested in discussing these or other topics in greater detail. Our contact information is below, and we look forward to connecting with you.
Hugh Campbell // email@example.com or (206) 436-2564
Nicodemo Esposito // firstname.lastname@example.org or (646) 887-0779
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