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Many organizations are looking at how they can adjust their operations and methods to better withstand pandemic-driven challenges. We summarized some common themes and practices from our many conversations with our private equity relationships over the past several weeks.

COVID Financial Management

Tips From Private Equity Clients for Managing Through COVID-19 Challenges

  • Ben Axelrod
  • Paul Novak
  • 3/27/2020

Key insights

  • Our clients and friends in the transaction world shared their insight and reflections about managing businesses during the coronavirus pandemic.
  • Many are reviewing and adapting their business practices — and overall they are maintaining a positive long-term view.
  • Read on to learn about their perspective on a wide range of topics, from looking at cash flow to working with lending partners.

Please note that we are writing this on the heels of the U.S. Senate passing the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act. As such, incremental impacts of the Act, should it pass into law, have not been incorporated in the comments below. Nevertheless, the strategies mentioned are likely to be applicable regardless of the final content of the CARES Act.

CLA’s investment banking team has spent much of the last three weeks on the phone with our business owner clients, management teams, strategic buyers, private equity groups, attorneys, lenders, and other key participants in the transaction world. The conversations we’ve had have been far-ranging, and thankfully, many have been positive. CLA’s clients are resilient and all are working hard to adapt and find ways to persevere.

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While every business is different, we thought our entrepreneur and family business-owner clients would like to hear how financial owners (i.e., private equity groups, family offices, and independent sponsors) are working through today’s challenges with their businesses and management teams.

Recognizing that not all strategies will apply to all businesses, below are several noteworthy observations and tips regarding the strategies financial sponsors are employing:

  • Remain vigilant, but also look for opportunities to excel. Most financial sponsors we have spoken to in the last week believe we will see a pronounced short-term economic slowdown. However, very few are worried about long-term impacts, because banks and other critical lending institutions are well capitalized and in great shape relative to what was observed in 2008 – 2009. As a result, many financial sponsors are proactively managing their existing investments, but also looking for unique opportunities to provide bespoke capital solutions where needed. These groups are looking to be a resource for businesses who need a partner with the capital and knowledge to navigate through the current environment and prepare for brighter days ahead. Similarly, owners of high-quality businesses should be asking themselves what innovative solutions they can bring to their existing customers, and possibly new customers, in these challenging times. Many of these solutions will undoubtedly also lead to great business in the months and years after the pandemic.
  • Consider innovative solutions for your workforce and new production schedules. Most business owners we have spoken with are asking their employees to work from home, whenever possible. Production employees are working staggered shifts, taking staggered breaks, and generally practicing social distancing. We have also heard of production facilities working overtime in order to work through their pipelines and reduce lead times. Some owners want to get as much product completed as possible in the event there is a case of COVID-19 at their facility. Some expect to also eventually run into supply chain issues, and while looking into alternative suppliers, are also considering building inventory.
  • Conserve cash but do not cause undue hardships on your vendors. Almost across the board, owners are asking management teams to conserve cash. In instances when an invoice may be paid early, the instructions are only to pay vendors early if the discount for doing so is significant enough to warrant consideration. At the same time, there is also strong consensus that it is a bad idea to challenge vendors with late payments, possibly pushing more financial stress on them.
  • Think through a 13-week cash flow forecast. Many private equity owners are asking their portfolio companies to present a 13-week cash flow forecast. In more normal times, the 13-week forecast is a tool used by advisors for companies going through financial challenges. In these times, it may be a great tool for all businesses to consider. Some owners have even gone a step further to ascertain if the business has enough cash available for three to four months of operations with zero revenue. In one case, a private equity group hired a third-party consultant to stress test all of their businesses and help with a contingency plan if more drastic measures are necessary. Even if concerns about cash flow do not appear to be immediate, consider more cash flow planning now.
  • Make strategic personnel decisions. Many business owners are helping their high-quality workforces persevere in the longer-term by selectively releasing underperforming employees now. Whether in healthy economic times or challenging ones, workforce reductions are never easy. But during turbulent times like today, eliminations may be more understandable and less likely to garner unneeded attention. With that said, many owners are being mindful of releasing employees with trade skills that heretofore were very hard to find. For example, metalworking businesses have had challenges finding experienced welders over the last several years, and most we have spoken to over the last two weeks are not releasing any of these highly skilled employees.
  • While the “pros” of any stimulus package may be glaring, take care to also consider the possible “cons.” For many businesses, stimulus money may present certain challenges down the road because of the stipulations the government will put in place. Assess how these stipulations may force owners to modify their business models, especially with the multitude of relief programs currently being put in place.
  • Proactive communication with your bank and lending partners is key. Banks are now first and foremost trying to protect their credits (i.e. investments). Many commercial lenders are taking a more active role with their credits, and many are asking for projections and/or sensitivity analyses from their borrowers. Ultimately, however, banks want to see their clients succeed, and companies with strong, long-term banking relationships are working with their lenders on near-term solutions. In some cases, banks have agreed to accrue interest, and we are aware of banks approving discretionary principal and interest deferrals for a number of months, with no documentation requirements. Conversely, businesses with more fragile banking relationships may find lenders are less apt to compromise and may want to put the business in workout, or charge penalty interest. Assess your banking relationships and consider more proactive communication.

How we can help

At CLA, our experienced investment banking professionals and industry teams can help you navigate disruptions caused by the COVID-19 pandemic. We are here to help you review your operational challenges and understand their financial impact. Together, we can help you make data-driven, informed business decisions during these challenging times and beyond.

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Securities products, merger and acquisition services, and wealth advisory services are provided by CliftonLarsonAllen Wealth Advisors LLC, a federally registered investment advisor and member FINRA, SIPC.