Surviving the Downturn—Considerations for Dealing with a Troubled Market

This is the second in a series of brief articles that Moye White is sending to its clients and friends to provide practical advice about the opportunities and challenges presented by today's economy.

Economic woes have impacted every segment of the business in the United States. The following are some considerations for businesses trying to weather this downturn.

Bring in the Team

  • Call the Board
    • During times of economic distress, the board should meet frequently and be provided with current information concerning the company’s operations. Specifically, the board should have access to financial information on at least a monthly basis and should be immediately informed of any material changes in the company’s condition, such a breach of loan covenants or the loss of a significant customer.
    • The board should develop an action plan for dealing with current economic conditions and ensuring that the business has sufficient operating capital to survive the next 12-24 months. The board should monitor the company’s progress and be ready to take additional action if necessary.
  • Inform the Shareholders
    • Make sure your shareholders are aware of the company’s financial situation. Explain your current challenges and opportunities and the steps the company is taking to respond. Keep the shareholders informed of material changes in your condition and do not just wait until the annual meeting to provide an update.
    • By keeping your shareholders informed, they might be in a position to help by providing additional financing, introductions, or other assistance, and you reduce the potential liabilities of surprising them with unexpected bad news.

Crunch the Numbers

Look at your current financial statements and prepare projections based on best-case, most-likely case, and worst-case scenarios. In particular, consider the following:

  • Make sure the company has enough cash Will operations provide enough cash to cover long-term and short-term payables without drawing on a line of credit or other external financing? Do you have enough cash to continue for another 12 months?
  • Monitor Accounts Receivable If your outstanding receivables are increasing, consider providing your paying customers an additional incentive for paying promptly. Also, watch for increasing receivables from specific customers. The further a customer gets behind, the less likely you will get paid.
  • Cut costs
    • Look for less expensive suppliers or contact current suppliers and see if they can offer a better price or bulk discounts.
    • Consider whether you have excess office space that can be sublet to another company. If the building where you lease space has a significant amount of vacancies, the landlord might be willing to renegotiate your lease at a better rate in exchange for an extended term.
    • Compensation costs are a significant expense for most businesses, so consider ways to reduce this expense. Consider whether perks like gym memberships and company cars can be eliminated or restricted without a material impact on employee morale. Retrain employees who are not at 100% of their workflow capacity to contribute to busier parts of the company. Determine whether sales personnel would be amenable to accepting salary reductions for higher commissions. If layoffs are necessary, consider the short-term and long-term effect.
  • Increase revenues
    • Consider whether reducing prices or providing other incentives will help drive sales and increase market share.
    • When the economy starts to decline, some companies immediately slash their marketing budgets. Consider whether to maintain or increase your marketing to help increase revenues during slow times.
  • Focus on your Core Business
    • Consider eliminating non-core or non-profitable business functions. If the new line of widgets is not selling, it may be prudent to liquidate and refocus on the more successful parts of your business.

Financing Options

Finding financing is a challenge for everyone in the current market, so you may need to consider more creative alternatives.

  • Bank Loans
    • If you currently have ban to have funds to timely make your payments. Even if you are still making payments, consider whether your financial condition will continue to satisfy your loan covenants. If you anticipate problems with fulfilling your loan obligations, do not just stop paying the loan and walk away. You may be better served by negotiating a work-out with your bank to allow you to remain in business and to continue to pay down the loan. Generally, financial institutions do not want to foreclose upon your company if there is a way for it to continue making payments.
    • Do not rely too heavily on your line of credit, as some financial institutions have recently terminated lines of credit even for their good paying customers.
  • Consider Alternative Financing Arrangements
    • Traditional bank loans are not the only mechanism for bringing funds into the business. Shareholders or other third-parties might be willing to loan funds to the company as a short-term bridge.
    • Likewise, capital contributions from existing or new shareholders can be a useful source of capital. This might be a good time to bring in new partners to help with funding and to take advantage of other available opportunities.
    • Convertible debt functions as a traditional note, but can be converted to stock later. This structure provides investors with greater protection in the event of liquidation if the business struggles and an opportunity for an upside if the business succeeds.

Look for New Opportunities

  • Adjust Your Focus
    • Sometimes there are great opportunities in a downturn that just require a little creativity to identify. You might be able to expand your business by refocusing your core business. For example, while the market for new homes has slowed, the market for home remodels has increased as some homeowners have decided to fix up their current homes rather than move.
    • Price and value are more important than ever to customers. Your marketing should clearly explain why your company provides greater value than your competitors.
    • Credit is tight for everyone, so assistance with financing or better payment terms (45 days instead of 30), can also set you apart from competitors.
  • Improve Your Market Position
    • Your key competitors, customers and vendors are likely also struggling in this economy. The downturn might provide you an opportunity to expand by acquisition. Since traditional bank financing for these types of acquisitions is limited, seller financing and extended earn-out payments are becoming more common.

For more information contact: Jackie Benson at (303)292-7912

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Moye White LLP has prepared this bulletin to provide general information, however this bulletin does not provide legal advice and does not create an attorney-client relationship between the reader and Moye White. No legal or business decision should be based solely on the content of this bulletin.