Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
The U.S. inflation rate in May hit its highest mark since 1981, reaching 8.6 percent. And economists are projecting that the country will head into recession in 2023. It’s not the recipe most were hoping for coming on the heels of supply chain shortages and pandemic-related uncertainty. But is all lost?
Not at all, says Tom Siders, a partner with L. Harris Partners. Businesses will have opportunities to grow and thrive but only if they play their cards right.
“You’re either going to A, play offense and make some bold moves, B, play defense and hope you can ride this out or C, you’re going to just give up your toys and go home,” he says.
In truth, option C probably isn’t feasible at this point. If you’re thinking it’s time to get out and retire, the last thing you want to do is go through an economic downturn — but in reality, that’s also the worst time to sell.
So, it’s time to stay calm and make a decision.
“If you’re going to be decisive and stay in business, the absolute first thing you do when you’re facing a recession is cash flow forecasts,” he says.
Do it for several scenarios. Update them regularly. Then immediately take them to the bank.
“Restructure your current debt, keeping your interest rates low,” he says. “Extend terms, lower payments and expand your credit line so you have some fallback in the event things go to hell. If you don’t have a credit line, get one. It’s going to be a bumpy ride.”
Next, focus efforts on liquidity. You’ve got to build cash reserves so you’ve got the savings account to withstand the storm. Sell your obsolete inventory or old equipment.
“Basically, put your balance sheet on a diet,” he says.
Explore new vendors to try and cut costs. Dual sourcing is good in the event one of your suppliers goes broke. Get rid of the bad customers. If they slow pay, no pay or complain a lot, Siders says, they are gone.
“Never waste a recession by hanging on to a real pain in the ass customer,” he says, adding that the same is true of employees. “I know it’s not in vogue to get rid of people today, but as the economy slows down there is always going to be somebody better coming along who is looking for a job.”
From there, Siders and others say, monitor your accounts receivable like a hawk and act quickly if somebody gets slow.
“You do not grant anybody good graces when you’re facing a recession,” Siders says.
Monitoring accounts receivables is not only important for your cash flow, but to make sure you are aware if a creditor may be headed toward bankruptcy, says Matthew Bialick, a partner with the MJB Law Firm.
Take note if creditors stop responding to you when you ask about late payments. Don’t hesitate to ask questions and, if the governing documents allow, ask for financial statements. If applicable, file with the Secretary of State to put in writing your interest in the case well before a bankruptcy filing.
“Be vigilant looking for signs of bankruptcy,” he says. “Being vigilant is going to be important in terms of the fact that the sooner you act if there is a problem — particularly before bankruptcy — the more likely you are to get paid. It also matters in terms of lien perfection.”
Lien perfection establishes the priority rights on encumbered property among creditors, he explains. And if a creditor files bankruptcy, it’s too late. So, act early.
“In a time where there is a recession that might be coming,” he says, “essentially, being a secured party is pretty much going to make it a lot more likely you are going to do well in a bankruptcy scenario.”
Bialick adds that if you wait and the company declares bankruptcy before you file, you’re out of luck.
In addition to monitoring AR, companies need to be proactive in making sure they continue controlling cash flow and covering costs. Part of that means looking at your prices, says Diane Paterson, director of the Small Business Development Center in the Schulze School of Entrepreneurship at the University of St. Thomas.
You probably need to raise them. Businesses already are feeling the effects of inflation in the form of supply chain shortages, higher transportation costs and the rise of wages amidst employee shortages. It isn’t a matter of if, but when, she says.
“The question small business owners need to ask themselves,” Paterson says, “is how much should they raise their prices to avoid eroding profit margins.”
Village Bank bankers have been meeting with clients for quite a while listening to business owners talk about what’s keeping them up at night. In addition to inflation, the concerns across the board are hiring, whether in the C-Suite or in lower-level positions; the supply chain challenges; and dwindling cash surpluses after the Federal Reserve talked about slowing the economy down.
“We are in the perfect storm,” says Aleesha Webb, president and vice chair at Village Bank. “It’s a much bigger storm than just one piece. Because inflation isn’t caused by just a rate hike. Inflation is caused by all the money the government just dumped in consumers’ pockets and businesses’ pockets. So, were the consumer and the business smart about how they spent that money? Even if they were, are they able to get the goods, service and products they wanted to spend the money on? It’s really a big storm that’s rumbling.”
So, what can business owners do to get through this? Webb reiterated the need for conversations with business partners. Can you get a fixed rate? Can your banker provide you information on what your debt payments will look like as interest rates shift? Keep in mind: Banks are busy right now. There is money in the market right now. Interest rates are going up, but historically, they are still far from high.
That said, make sure you have a crisis contingency plan for hiring, supply chain and other challenges. Will you have enough cash? Or access to cash? Make sure it’s available and make sure you know what steps you have to take if your inventory is slow or if there is a dramatic wage increase or bonus you have to pay.
“You’ve got to be meeting with your banker, you’ve got to be meeting with your accountant,” Webb says. “One thing we’re doing a lot of right now is stress testing. So, if rates go up by 50 basis points, what does debt service coverage look like based on revenue and expenses today. If it goes up by a point, a point-and-a-half? These are things your banker can do for you.”
Then do what you can to mitigate surprises. Monitor appropriate metrics to your industry. Communicate with employees, customers and others. Take necessary preventative measures to make sure you’re in good shape.
“Then you don’t have as many surprises,” she says.
As the current inflationary period drags on, one good sign is that most clients of Boeckermann Grafstrom Mayer (BGM) still have decent balance sheets due to government funds received during the pandemic, says Cory Parnell, principal and CEO. So, many companies aren’t reeling yet.
His accounting firm is working to help clients through this time and he’s largely on the same page as other financial experts. Cut expenses that don’t derive revenue or generate profits. Consider deferring capital projects.
If balance sheets do look bleak, Parnell says, companies can look at vendor terms and bank relationships. Definitely communicate early and, if you end up renegotiating terms, make sure they’re favorable enough where you can stay current.
“They can be a great partner through the process,” he says. “Just make sure whatever you agree to you are able to meet it. If you don’t meet them, there is a lot of trust lost very quickly.”
Finally, Parnell says, given the difficulties in hiring right now, companies might consider avoiding layoffs and instead cutting salaries across the board. Several clients did that in 2008 and “everyone in different organizations appreciated that,” he says. “It’s a lot better for everyone to go down if it’s 10 percent than to chop off the labor force to equal that 10 percent. That helps you, especially in a tight labor market, in regard to when the economy does start to recover. You’ve got those individuals and you’re able to move them back up as times allow.”
Avoiding layoffs, if possible, might also be safer from a legal standpoint. As liquidity dries up, reducing head counts always carries potential legal ramifications, Bialick says, particularly if it’s someone let go just a short time after they were hired.
“At a minimum, there are potential unemployment or discrimination claims,” he says. “If someone is not happy with that situation, there could be a variety of legal actions.”
Similarly, monitor contracts with suppliers who might be looking at termination provisions or force majeure clauses when it comes to supplier performance.
“If there starts to be economic stress that is going to be affecting suppliers … It’s important to realize that if it’s an agreement that is too permissive, that is too low in terms of accountability of the supplier, that might be a reason to be more proactive in terms of looking for new suppliers or a wider variety of suppliers.”
While times are tough, there will be opportunities coming in the months ahead, as well. Businesses with strong financial situations might be able to acquire competitors undergoing distress, Bialick says.
“Anytime there is an economic downturn there are companies that are going to be better or worse able to weather the storm,” he says. “Better competitors can use this as a tremendous opportunity.”
That’s why one cut you should avoid making is to your marketing budget, adds L. Harris Partners’ Siders.
“It is the worst thing you can do,” he says. “It’s the easiest and most likely idea to cut our sales and marketing. But you are going to have competitors go broke. And if you are front of mind with those people you have a chance to pick up better customers than the ones you just fired.
You can gain market share even in a recession.”
Same with employees, Webb says, adding that the clients she has spoken with still are trying to hire people who fit in with their culture and who aren’t going to chase the next massive salary increase they are offered. There will be opportunities to do that if you stay disciplined and prepared.
“That takes culture and time and money,” she says.
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