Can You Still Leave Your Business When You Planned? Part I: Stabilize
For business owners who were close to transitioning out of their businesses, their plans kind of got wrecked on March 19, 2020 with the arrival of a Pandemic. Life as we knew it came to a screeching halt and for some, so did those carefully laid plans to finally move beyond their business life.
As the dust clears and the economy starts to open up again, the big question is whether the exit or succession train can still leave on schedule. The answer for most is not yet, which brings up the question of what steps can you take to get back to a reasonable schedule?
Businesses are like income engines. They have value because they can produce income and the volume and quality of income produced has a lot to do with the value of the business itself. Income flow for most businesses was interrupted or has slowed down. If you are one of the lucky few whose business actually increased during the shutdown, you may be in better shape to move quickly with a sale or your succession plan. But for most businesses there is a new storm of uncertainty that is bearing down on them.
Value is enhanced by certainty. First and foremost, stabilize and open the doors for business. It’s time to move past the triage stage and begin to rebuild the business and income flow. This post is not focused on the steps you need to take from a business perspective, but rather the steps that you should take from an often ignored perspective, namely, the legal perspective.
Your Legal Infrastructure
Your business has a legal infrastructure and a sound, solid legal infrastructure that provides stability and a degree of certainty that can enhance the value of your business. After all is said and done, if you are looking to transition out of your business, its value is of primary concern. Much of this legal infrastructure is made up of the contracts you are bound by. This web of contracts, with their benefits and obligations, makes up a large part of the foundation of your business.
Many business contracts failed to work properly during the recent shutdown. Nothing like the pandemic and corresponding shutdown was anticipated or provided for in contracts. That has exposed many businesses to added risk, which needs to be addressed quickly. Risk, remember, drives business value down. Now is the time to re-evaluate and seek to renegotiate your contracts with customers, vendors, landlords, banks and insurance companies.
Your credit facility and relationship with your banker is critical. That is one of the first set of contracts you need to evaluate. Are you now out of covenant with your bank? If so, the sooner you approach your banker the better off you will generally be. But you need to develop your plan quickly first. Approach your banker with a well thought out plan and proposal, not a deer in the headlights look.
Everyone has been hit hard, which means you are not the only customer your bank will be concerned about. That is a tremendous advantage for proactive businesses. Your bank is likely to be inundated with requests for loans, modification of credit facilities, forbearance and the like. Businesses that come in with well thought out plans of recovery are likely to have a much easier discussion with the bank and more positive results. You may be out of covenant but you can demonstrate that you have a plan to correct the situation or reasons you need to modify the key ratios.
If you would like to read more about this topic, follow our blog posts and look for guest blogs in the next several months by experts that can help us sort through these issues.