Despite the COVID-19 pandemic, most people will not become infected. But all of us and our businesses, whether medical, retail, wholesale, professional, real estate or industrial, will be greatly affected by the government ordered shutdown. Congress has passed the CARES Act to provide SBA financing to small businesses, make direct payments to workers and offer other assistance to Americans and their businesses. New Jersey has proposed legislation to require business interruption insurers to pay on claims arising from the pandemic, despite the disease causation exception in their policies. New York may be considering similar legislation. Additional assistance from the Federal government seems to be in the offing.
While Federal, State and local government appears to be addressing immediate needs, once this pandemic is over and business begins to return to normal, businesses will still need to come up with strategies to rebuild and renew their business model. While the small business provisions of the Bankruptcy Code may offer some a solution, in many instances it may be that the cure is worse than the problem.
So, we offer a small bit of advice as to how to recover from the significant blow to your business.
- Make a plan. We know it sounds simple, but recovery planning is a major part of beginning the process and can begin now. In doing so, make carefully calculated assumptions as to when your business will get back to normal, the kind of financing it will need, how it will deal with its accumulated debt, and what staffing levels it will need in the ramp up to full operation.
- Be completely truthful. Many companies working out repayment agreements with their creditors paint a rosy picture of future growth and make promises that they ultimately can’t keep. If you believe it will take 18 months to fully recover, don’t tell you lender or your suppliers you can bring them current in 6 months. On the other hand, don’t paint such a bleak picture for them that they believe you will never recover only to see your profits drastically increase after the debt is forgiven.
- Cash Flow is King (or Queen). While profit is wonderful and accountants prefer to speak of it, in a distress business environment, cash flow is the most valuable tool. Consider cutting net profit to just above 0% in order to stimulate cash flow. Shed excessive inventory, even if it has to be discounted below cost. The more cash you have, the better you will be able to put that cash to use in rebuilding your business.
- Landlord and Tenant cooperation is essential. As a tenant, remember that your landlord is hurting too, as the landlord needs the rent to operate the building, pay taxes and pay the mortgage servicing. As a landlord, remember that if you have a good tenant at a fair rental, you want to keep that tenant. Be flexible in agreeing to forbear from collecting a few months of rent in exchange for payments being stretched out over time or even forgiven, as a cost of retaining that tenant. One of the major fallouts of economic downturns as we learned in the late 1980s is that real estate values suffer, and refinancing becomes more difficult. A fully rented up building or shopping center is much easier to finance.
- Don’t give –LOAN. If you are going to invest your own money back into your business, do it by way of a properly documented loan, and, if possible, with a security interest. The failure to properly document a loan with a note, may lead to the loan being deemed an investment which will put you on the back of the line to be repaid, if all your efforts fail and the company is ultimately liquidated.
- Use your professionals. We know it is an added expense at a tough time, but while using accountants and attorneys to help structure deals with creditors or troubled businesses at the beginning may cost more up front, the ultimate savings by not making critical structural errors in such agreements, can be both life saving to the business and less costly in the long run.
We hope that these few tips may help you in preserving and ultimately growing your business when the crisis eases. Stay safe, stay smart and call on us if needed.
Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.
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