How to decide whether to close a business during the pandemic – MarketWatch

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How to decide whether to close a business during the pandemic – MarketWatch

The 2020 pandemic sent many businesses scrambling to protect their employees and pivot their operations to retain their customers. This crisis present

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The
2020 pandemic sent many businesses scrambling to protect their employees and
pivot their operations to retain their customers. This crisis presented more challenges
and opportunities over the course of a few months than most businesses see in a
decade.

While many managed to stabilize their business through these efforts, a select group were able to thrive depending on factors like their industry, location or existing business model.

But for those that only managed to buy some time and are still struggling, it’s time for Phase 2 of their response, one that requires making fundamentally tougher decisions about restructuring the business or even selling it before things go further south.

This applies particularly to middle-market companies with revenues ranging from around $20 million to $250 million with 75 to 900 employees. They’re likely to be in manufacturing, B2B services or retail and entertainment, and tend to be more reliant for funds on bank lending and small investor groups.

Decision time

Phase
1 of the COVID-19 response involved quickly reacting to the unknown by
furloughing employees, cutting discretionary costs, scaling back operations and
taking full advantage of government relief programs, especially working with
lenders on the Paycheck Protection Program loans. All these actions provided
additional time for businesses to determine how they could change to remain in
business.

Where
businesses have continued to lose money and prospects remain doubtful, they
have reached another inflection point of the pandemic crisis, namely whether
they can survive Phase 2 of COVID-19.

While the changes required in spring 2020 were difficult, at this point money-losing businesses face the existential question — what more can they do to survive? Or should they look for an exit? This type of decision demands more radical steps that challenge some of a business’ sacred cows, forcing owners and management to confront decisions they have tried to avoid. 

Maybe
you need to fire that original customer to whom you have an emotional
attachment but who’s always late with payments or whose business is
unprofitable for you. Or perhaps it’s time to take the previously unthinkable
step of terminating one or more long-time employees (who might even be family
members). 

Owners
may need to make personal sacrifices, give up long-cherished goals and put in
more sweat equity. For many owners, its whether they have the stomach to go
back to the beginning when they were drawing very small salaries to get the
business launched. This may entail adjusting their own lifestyle to give the
business additional liquidity to make it until the economic recovery kicks in.

These
are the kind of decisions that cut straight to owners’ sense of self-worth and
concerns about reputation, making Phase 2 at least as much about psychology as
it is about cash flow and market strategy.

Owners should be making a clear-headed evaluation of whether it makes sense to persist or whether it may be the right time to sell.

Step one

First, this requires an assessment and understanding of the competitive outlook in their niche or industry. If many competitors are struggling and judged unlikely to make it through the crisis, it may be worth hanging in there on the expectation of increased market share and outsized profits on the other side. It may present opportunities to buy competitors who fill a gap in your product line, helping you to emerge stronger.

But the outlook is bleaker if the competition is healthy and you’re one of many companies without any unique offerings.

Step two

The
second consideration revolves around an owner’s own risk tolerance and
personal/family goals. If selling the business can eliminate the risk of having
to take out a second home mortgage or tap personal investments, it may make
sense to take that route rather than risking it all on an uncertain future.

This
is where psychology comes into play. Owners often fall into the sunk-cost
mentality trap, finding it impossible to accept a price they feel undervalues
what the business may have been worth in 2019.

If they take the restructuring route, businesses need to be ready to throw away the rule book and take the kind of bold action they might not countenance in normal times. Businesses too often feel like their hands are tied by agreements and contracts, but there are options that can, and should, be pursued when faced with a shortage of cash.

Just because you signed a 10-year lease for a space that’s now too big for your needs doesn’t mean you’re “locked in” as many businesses assume. Landlords have plenty to lose if your business fails, so it’s worth pushing for creative solutions like sub-leasing, sub-dividing or buying out of the contract altogether at a discount.

Likewise, if you can no longer stay in business by selling to customers at a previously agreed price, your option may be to raise prices or else have the customer try to find a replacement supplier if the alternative is your company closing. When you have nothing to lose and potentially a lot to gain — better to ask and see how badly they need you. 

Selling off parts of the business is another strategy that shouldn’t be limited by conventional thinking or emotional ties. It may feel hard to let go of that popular store in a great location, but what if you could package the sale with an underperforming store, leaving you to operate the remaining stores that perform respectably?

Restructuring involves a delicate dance between short-term survival and long-term health. Many businesses, for example, went too far in cutting staff in the early days of the pandemic only to struggle to rehire when the worst-case scenario didn’t pan out.

It’s wise to have a base-case scenario — planning for a 50% fall in volumes, for example — but with flexibility to account for different potential outcomes. For many businesses, the priority would be to keep their team together through a downturn even if it means only breaking even for a few years.

Phase 2 requires brutal honesty and some painful decisions, but the pay-off isn’t just survival — it can lead to new growth opportunities and a leaner, healthier operation over the long term.

Tim Weed is a partner and
leader of the restructuring practice at Plante Moran.

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