Businesses are being hit particularly hard by the pandemic and must take a proactive approach to address the disruption. Owners and CEOs need to focus on time, liquidity, parallel tracks, transparency, and professional resources to help them position their companies to prosper on the other side of the curve.
1. TIME is limited and fast decisions need to be made
- Protect employees, stabilize the supply chain, and engage top customers
- Stress-test realistic cash flow projections and identify core assets and vital operations
- Articulate preservation and growth strategies
- Act with urgency and anticipate time compression – the current global situation is rapidly developing and can mean sudden, unpredictable turns
2. LIQUIDITY is paramount and comes from many sources
- CARES Act assistance (i.e., SBA loans and Paycheck Protection Program)
- Alternative capital – an entire population of non-bank lenders and structured equity providers eager to put money to work to fill the void left by banks
- Negotiating with vendors, landlords and creditors who are likely to extend unprecedented favorable terms to strategically viable businesses
Notably, alternative capital providers can help companies that face potential bank covenant violations or liquidity crunches. This capital often comes in the form of “junior capital,” which is subordinated debt or preferred equity that sits junior to the bank and senior to the common equity. This non-dilutive or minimally dilutive capital allows owners to retain their common equity while navigating uncertain markets.
Alternative capital providers will ask some key qualifying questions:
- Does your business have a strong management team that inspires confidence?
- Are your financial reporting and controls in order?
- Do you have a broad base of customers and vendors with no undue concentration?
- Do you have predictability and visibility into your revenue and EBITDA post-crisis?
- Is your industry well-positioned to recover quickly once the pandemic passes?
A general rule in capital raising is to raise more than you think you need, quicker than you think you need it.
3. PARALLEL TRACKS greatly increase probability of success
- Pursue the aforementioned government and alternative capital strategies
- Identify potential merger opportunities – combining with a competitor or complementary business can build a strong player and platform for growth
- “Go shopping” – partner with a financial sponsor to go on an acquisition hunt and create an industry leader
4. TRANSPARENCY with all constituents enhances long-term viability
- Take care of your team – you need them to get through this
- Overcommunicate with your customers so they will stick with you
- Be upfront with suppliers and landlords – they would rather work with you today, so they have a viable customer tomorrow
- Share multi-scenario 13-week cash flow projections with current creditors
5. PROFESSIONAL RESOURCES must be secured quickly
- Crisis managers, investment bankers, and special legal counsel can be invaluable
- Good resources will be scarce so act fast
- The ROI on these services is immense
Focusing on these five things will help you navigate uncertain markets during these unprecedented times for CEOs, business owners, and our entire community.