I continue to offer free 30 minute consultations to clients and other entrepreneurs to assist them through the Covid-19 crisis. A common question is about downsizing and restructuring.
Based upon my own experience as an entrepreneur, the research that I did for my book Lessons from the Edge and conversations that I recently had with the head of Fasken’s Insolvency and Restructuring Group, here is the best advice I can give you when thinking about reducing your overhead:
1. Reduce the burn rate. Look at all of your expenses – rent, wages, material contracts – and identify where you can make reductions.
2. Redo the numbers. Revise your projections. Do at least 3 scenarios: a) a base case, assuming you do nothing, but revenue declines; b) modest cuts; and c) drastic cuts. Run the numbers assuming that this crisis goes on for at least 18 months. Figure out your cash flow numbers and identify when you might run out of cash.
3. Review all agreements – leases, credit agreements and other material contracts. Are there any existing defaults? Determine if and when you might become in default down the road.
4. Talk to all stakeholders – employees, landlords, creditors, suppliers, investors, etc. Develop a communication strategy. In my experience, honesty and transparency is critical. Remember, your creditors have obligations too. The better you understand their position, the better you will be able to work out a mutually acceptable solution.
5. Develop a plan for your employees, taking into account the various government programs. Some may be terminated, while others may be laid off or take advantage of the Federal government’s work share program.
6. Talk to your lawyer. Your legal advisor has been through this process before. They will have a sense of what the market is doing and what other counterparties are agreeing to under the circumstances.
7. Implement your plan. When talking to your landlord, lenders and other creditors, your options can include:
- Payment deferrals;
- Interest reductions and capitalization; and
- Amendments to the terms of your agreements.
Landlords may be amenable to deferring rent and perhaps extending the lease. Remember, they too have lenders that they have to answer to.
8. Look for new capital. Except in some unique cases, this might be difficult for a while. However, there will be investors looking for businesses that can come out of this crisis stronger than ever. Cash is king and investors know it. Expect hard bargaining on valuations and terms, which will be more investor friendly.
9. If all else fails, you can seek creditor protection in the courts. Let’s hope that it doesn’t come to this. Nevertheless, keep in mind that, with a financial backer in hand, there can be many creative ways to restructure a business to get rid of unwanted liabilities.
I am still talking to an average of 5 or so entrepreneurs a day. I would be happy to chat, if you want to run your situation past me.