Proactive Actions for Middle Market Company Owners to Consider in These Challenging Times
March 19, 2020
The past two weeks have created a strong need to connect against a backdrop of increasing isolation. We are currently navigating myriad uncertainties, for which there are a lack of concrete answers.
Unfortunately, our team does not have the answer key. What we do have is access to a broad range of business owners, entrepreneurs, and industry experts, built up over our 20 years of operating in M&A and capital markets. The content here is a compilation of ideas that business owners are considering, or taking action on, to strengthen their company in this environment. We felt compelled to share these with you, as they may assist in your planning as you navigate your company through these times.
While these are unprecedented circumstances for modern society, we are reminded of the prior periods of market dislocation and uncertainty through which we have advised our clients. We’ve seen numerous examples of great companies enduring some of the most extreme circumstances—only to come out on the other side stronger and more agile.
This provides context and comfort for the conversations we’re having today with family business owners and entrepreneurs. We recently shared our insights on how Coronavirus is impacting M&A and capital markets. In the thoughts below, we’ve combined our past experience with real-time crowdsourced information to share insights on how to best lead your organization through these extraordinary times.
Strong Leadership will be a Meaningful Differentiator to Maintain and Create Near-Term Value
Exercising strong leadership during this dislocation will pay enormous dividends—of that, we are certain. As difficult as this is on so many levels, great leaders can create a sense of calm and foster confidence, enabling their organizations to remain functional as they chart a path through these rough waters. Focus on what you can control, being proactive about planning and action, while minimizing a reliance on reaction.
Management teams have an opportunity—and even responsibility—to rise above the day-to-day noise and instill confidence for employees, customers, suppliers, and their communities. Resolute organizations will undertake measures that will help to create long-term value, while remembering to balance determination and grit with an equal amount of empathy and humility, given the hardships many people and organizations are facing today. Actions taken now will serve to separate the strongest companies from the pack.
Most fundamentally, we suggest the need to communicate, coordinate, and cooperate with all constituencies over the next several months.
Your employee base, arguably your business’s most important asset, will appreciate and value your transparency and support. Keeping an open line to listen, understand, and address their concerns will be critical to keeping your team aligned through this period.
Likewise, a strong communications strategy with your customers should be a top priority. As things normalize, there will be lasting market shifts and continued dislocations that change the focus of how businesses operate. A cost-focused mentality may be replaced by a more holistic approach focused on business continuity, service levels, and risk management. Your customers will remember you reached out and value the communication and messaging as you seek to be helpful to them.
Your suppliers will remember who worked with them positively during this time, and those that stay close and act in partnership will likely derive long-term benefits. These are the times to make a positive mark in the history of your company and position yourself for long-term success.
Proactive Actions for Business Owners
In addition to exhibiting strong empathic leadership, there are several additional actions you can take to ensure durability through this crisis. These are insights we have gleaned from other family businesses, entrepreneurs, and industry professionals which we thought could provide valuable guide rails as you plan for today, tomorrow, and the future.
Shore up your Balance Sheet
- Consider drawing partially or fully on your line of credit. If credit freezes, you do not want to find yourself in a situation where you have technical access to low-cost capital, but no ability to draw it.
- Assess covenant compliance under a variety of scenarios to understand where risks exist with your credit relationships. It is better to be in front of these issues than be reactive. If there are concerns address them with your bank directly and immediately, as banks will be more inclined to work with you on solutions when you are transparent and proactive.
- Consider restructuring term debt to optimize cash flow. As rates continue to fall, there may be opportunities to come out of this with more cost-effective access to capital. Additionally, you can re-term your debt to a longer amortization, which may yield material positive near-term cash flow implications.
- On a limited basis, you may explore federal disaster relief programs including SBA loans, as a variety of funds are starting to open up. Qualification criteria range widely, so consult your legal and accounting team for specifics in your situation.
- As our Food, Beverage & Agribusiness Group outlined in a recently published thought-leadership piece called The Effect of COVID-19 on the Food & Beverage Business Environment, stress-testing your financial statements is imperative to model varying scenarios and the financial impacts on your business. Model downside budget scenarios to demonstrate how an economic slowdown may impact cash flow. This is an area with which we are actively assisting clients.
- While some pockets of the debt capital markets may be challenged, there are still numerous bank and non-bank financing organizations that will keep capital flows open. While these may be more expensive or come with tighter terms, especially in the non-bank lender pools, it may be wise to consider taking on capital for offensive or defensive scenarios.
- As happened in the 2008/2009 time period, many private equity funds and family offices will shift to offer minority equity capital solutions vs majority or full buyouts. This can provide an alternative for you to tap equity capital without selling the business in today’s valuation environment.
Explore Options to Take Care of Your Employees
- Proactively ask your employees to communicate their immediate issues, concerns, and needs. They may not feel comfortable unless you invite them to reach out to you. Provide a positive outlet, and ensure you have a handle on the near-term hurdles they are facing. Your empathy will be rewarded with loyalty.
- Use employee input to develop a formal employee plan for the next 30 to 60 days, outlining ways in which you can and will provide assistance. Clarity will go a long way in calming the team, demonstrating you care and are looking to help. You will derive near and long term goodwill and productivity benefits.
- If financially viable for your company, consider accelerating paychecks to employees to get them cash. Peace of mind will help their productivity and enhance loyalty.
- Should employee layoffs be necessary, we recommend taking swift, transparent action to help alleviate uncertainty for all involved. Also focus on reassuring remaining employees to avoid undue fears.
Proactively Communicate with Key Customers
- Listen and understand core concerns and issues with each customer, and develop a customized game plan to serve them through this time. They will remember it.
- For customers with acute financial challenges, consider revising pay terms or other temporary relief measures that allow for longer-term relationship continuity.
- Explore issues with their other suppliers to see if you may have opportunities to expand the relationship and expand your customer share in areas where you have a comparative advantage for the customer.
Encourage Communication with High-Value Prospective Customers
- Ironically, this could be one of the best periods to be in active communication with customers you may have lost in the past couple of years. If they are having problems with a current supplier, this may provide you with an opportunity to support them during this period. If they consider changing relationships in the near or long term, they will remember this and you will be well positioned.
- In cases where you have lost out on new business to a competitor in the past year, it may be worth revisiting with the customer to see if you can better serve them in this environment. Many companies will move to dual supply relationships to mitigate risk as business continuity receives greater emphasis.
- Encourage your sales force to be very active in communications with target customers right now. The worst thing you can do is shut down proactive outreach. The current market dislocation can be an optimal time to open dialogue, gather market data, and be in position to convert new customer relationships given the changing environment may play to your company’s competitive advantages now.
- Finally, many companies will now strongly reconsider moving material portions of their supply chain back on-shore, as security, reliability and proximity may become more important than cost. You want to be actively talking with prospective customers about this now to be in pole position.
Reach out to Your Competitors
- We recommend opening dialogue with your competitors now. While this may be somewhat counterintuitive, it is a great way to gather insights and information in a mutually beneficial manner. There may be ways you and your competitors can work together in the short-term to create meaningful benefit for everyone involved.
- Consider or revisit business combination dialogues. A merger or acquisition opportunity that had historically been unavailable could become actionable in the near-term. This will be especially true if any of your competitors are highly leveraged. It is better to know about it and not act, than to not know where opportunities exist in this environment.
Critically Assess all Variable Spending
- Review and revise your contingency plans so that you are well in front of potential issues and ready to take clear action based on how things may play out in the next 30 to 60 days. Generate upside, base, and downside case models and plans.
- Strongly consider taking action immediately to reduce all non-essential variable costs. You want to be in front of this to shore up cash.
- Review your major cost line items to evaluate any opportunities for partial cuts or temporary pausing to provide near-term relief.
What Actions Are You Taking? Reach Out Today.
We would welcome the opportunity to understand the actions you are taking to help guide your company through the next few months. And since our team is organized by subsector, we have significant insight into the complexities that you may be experiencing as you navigate and make critical decisions that are very industry-specific. Factors like consumer buying behavior, employee isolation and work from home issues, supply chain disruption, and distribution risk are all being impacted by COVID-19.
If Cascadia can be of assistance to help you apply any of these ideas, or lend any needed support to you during this challenging time, please do not hesitate to reach out to me directly.
Chairman & CEO | Cascadia Capital