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The Pandemic and Michigan Small Business: How Your Company Can Launch a Turnaround

Chuck Mouranie - Partner and Managing Director ·

At the start of the coronavirus pandemic, small business owners braced for what seemed like a short-term inconvenience. But as the coronavirus pandemic drags on, many small businesses are still operating at limited capacity or have shuttered completely. The past months have been tough on everyone. We’ve been urged to stay away from our elderly family members and other loved ones, wear masks in public and social distance.

Governments have shut down bars and restaurants, limited gym use, postponed sporting activities, restricted hair salon and personal care services, and encouraged people to stay home. Then there’s the travel industry – everything from air travel to cruise ships are feeling the pain of consumers staying home. These actions have forced many establishments to lay off staff, and small restaurants and shops have been shuttered, not to mention that the entertainment industry has been all but decimated; concert venues and movie theaters continue to sit vacant. Mom and pop stores unable to transition to an online platform are closing left and right. Ultimately, the economic impact of these actions has devastated small business.

According to a recent Yelp study, almost 100,000 small businesses in the U.S. have closed permanently since the pandemic began.

Insight from a Turnaround Expert

As a recently appointed Sub-Chapter V Trustee, I am even more aware of the numerous businesses struggling to survive during the pandemic. Our consulting practice has helped many clients weather the storm. In this article, I will share with you how businesses can rebound and adjust to the new economy. Specifically, you will learn about:

  • How to increase cash flow
  • How to avoid bankruptcy
  • How to seek professional help, including the specific type of help and when to get it

First, I’ll briefly discuss legislation, economics and some of the industries most impacted by the pandemic.

Local and National Economic Outlook

In Washington, the lack of progress on another stimulus package has forced small business owners to dig deeper into their own pockets to pay essential bills like rent, utilities, and healthcare. Over $300 billion in small business loans have been deployed via the Paycheck Protection Program, which continues to offer Economic Injury Disaster Loans, represented by the U.S. Department of the Treasury and the SBA. Payroll Protection Program (PPP) funds kept many business’ doors open, but unfortunately, there are little to no operating funds left. The bottom line is the crisis has lasted longer than anyone anticipated and as state reopening plans keep changing or getting pushed back, businesses trying to survive are falling deeper into despair and debt.

The jobs situation is a mixed bag as well. Nationally, over 5.5 million people are unemployed, with daily unemployment claims exceeding 700,000 people. Unemployment in Michigan was 8.5% as of September 30, 20201. Clearly, the recovery has stalled and is potentially going backwards.

Impacted Industries

The coronavirus pandemic is impacting all areas of our lives, from food to housing, healthcare to small business. Industries are being affected in a variety of ways. Some are even doing well. For example, consumers are spending money on home improvements instead of vacations (obviously not the best news for ski and golf resorts). This means building products are in short supply as demand explodes. Good luck getting a contractor to work on your house as the backlog is extensive. Food purchases from grocery stores are booming even with the increase in prices. Personal protective equipment (PPE) is also a new domestic business that will continue to flourish for the coming year.

As you can guess, not all small businesses are equally impacted; those able to pivot away from in-person services, with products that sell well online, have fared better than service-oriented businesses like bars, restaurants, small retail shops and hair and nail salons.

According to the U.S. Chamber of Commerce, more than 82% of the jobs lost since February 2020 have been service industry jobs. Retail jobs are down 4% while leisure and hospitality jobs are down about 25%.

How Can Businesses Bounce Back?

What can small businesses who are struggling in the hardest hit industries do to bounce back? The ability to think outside the box is a tremendous benefit to businesses trying to keep their doors open and not fall into debt.

Let’s reflect on Michigan restaurants, for example. With indoor dining shut down again, many of them are getting especially creative by carving out new outdoor dining spaces – transforming parking lots and streets into gathering spaces for families who are tired of cooking or friends desperate to spend time together. Bars and restaurants have amped up takeout and delivery options and some have even received clearance to offer carryout cocktails, once illegal, but now an olive branch offered by the state to the suffering dining industry.

So how do struggling small businesses get more of the help they need? In order to avoid the closure of these longstanding icons of our communities, small business owners must first assess what got their business to its initial level of success before the pandemic started. Now is the time to develop a strategy to deal with the current economic conditions. Start by answering these questions:

  • What did the business do best?
  • What is strictly a legacy? (i.e. “we do it this way because that’s what we always did”)
  • What changes in the market have occurred or probably will occur when the customers return/business resumes?
  • What will the consumer want online today and in-person later?

These must be the first questions answered and all done while conserving cash, which will be discussed in the next paragraph.

Remember, avoiding getting help only digs a deeper hole for a business in trouble. You may not like reaching out in a time of need to your lender, vendors, or tax authorities due to the fear of rejection, but you must overcome your embarrassment or pride if you want to save your business.

Chapter 11 as a Last Resort

If all else fails, the new Small Business Reorganization Act of 2019 offers a fast track to Chapter 11 reorganization. This includes limited costs, no absolute priority rule (owners can retain control of the company), no creditor committee, and speed to the finish line. On a national level, the entire process is under the guidance of a court appointed Trustee who helps gain consensus of the business owner’s reorganization plan. The Trustee works to mediate for the parties and offer suggestions to create and execute a fair plan for all parties. This has been an outstanding tool for small business since its launch in February of 2020.

At the end of the day, business owners know how to run their respective businesses. After all, they have been doing so for years with great success (pre-pandemic). Ask for help with the transformation. Your accountant can help with the cash flow strategy. Your lawyer can help hold off the creditors if needed. Yet there is one group of people who can turn around the company. They are professional reorganization consultants.

The good ones are both financial AND operational experts. Small business needs both an infusion of cash and a series of new processes to drive the business (see the questions about strategy above). It can be tough to reach out for help when funds are limited. However, it is worth the initial cost and will help you weather the storm and turn around your business. These professionals can find funding, work out payment plans, make operations more efficient and relieve stress on the business owner and employees. The turnaround professional can help fix your business and you can focus on running the day-to-day operations. Ask your accountant and lawyer to help you find the right turnaround professional for your business.

How do you know who is trained to help turn your company around? Here is a list of questions to ask:

  • How long have they been in the turnaround business?
  • How many turnarounds have they been DIRECTLY involved with? Some simply sit on the sideline and aren’t actively working on the engagement.
  • What is their background in small business? Size does matter when finding the right advisor, as larger businesses have other challenges and benefits that are not available to small businesses.
  • Who will work on the engagement? Many larger firms will have junior associates work on the smaller engagements. The business owner fails to gain the benefit of the senior consultant and this could cost you with delays, dysfunctional strategy, and failed negotiations.
  • Ask the advisor where they get their leads. Do they receive them from banks or lenders? If so, be extremely cautious as there is a potential conflict of interest when it comes time to negotiate a bank settlement. This advisor is serving two masters, therefore not being a true advocate for the small business. This conflict should be avoided.
  • Does the advisor have lender connections to find near and long-term financing? These will become critical should the exiting lender want to exit the relationship with the business or added funds are needed to bridge the short-term cash deficiency.
  • Ask for BIO’s of those who will work on the engagement and their availability to join the fight right away. Waiting doesn’t fix the issue.
  • Request the contact information of not less than three business owners that previously engaged this firm. You want to initiate a private conversation with these people. Be prepared to ask pointed questions about the advisor’s expertise, culture, and interpersonal skills. You are going to war with these people and they need to be true advocates for the business. We find this to be similar to being a Marine in the trenches. The team (both the advisors and your staff) must be able and willing to work together to win the battle.

The battle to survive the coming months is worth your time and energy. You have built your business from the ground up with hard work, dedication, long hours, plenty of sweat and sleepless nights. Don’t let it fail by wishing it to come back. Drop your ego, ask for professional help, and get moving. Use the resources in this article to help you turn around your business and get back on track.

Sources:

  1. Michigan Department of Technology, Management and Budget – October 21, 2020
  2. New York Times – December 3, 2020
  3. Letter from Governor Gretchen Whitmer to the Michigan Legislator dated November 25, 2020.
  4. Politico – Katy O’Donnell October 18, 2020
  5. Website: cnbc.com/ Small Businesses Are In Survival Mode As The Covid Pandemic Drags On/ October 15, 2020

Need help taking next steps to help get your business back on track? Fill out the form below and a turnaround expert will contact you.