COVID-19 continues to significantly impact businesses, but there are ways companies can emerge from the current crisis stronger.
The Wilmington Business Journal recently asked corporate and securities attorney Ken Bart and Director of Consulting for Ward and Smith Business Consulting, Hank Harris, how businesses can strategize for a post-pandemic environment. Their comments appeared in the latest "Insightful Discussion."
COVID-19 has brought stressors on businesses that were unheard of just a year ago. What should business owners be thinking about strategically at this moment in time?
Hank Harris: I think the one thing that
all business owners need to consider is how their business will
transition to the next leader or generation of leadership. In the
big picture, all businesses have only two fates – they are
either sold or they are liquidated. An internal transition is just
a form of sale. It may be to family, or employees, and discounted;
but it is still a transaction. Three things are different today.
First, privately-held business models are less homogenous than they
used to be. Widely held ownership in a private company is more
common in today's world. Second, there are more exit strategy
options available to owners today. At this time in particular,
it's worthwhile for owners to understand their exit options and
prepare, even if that time is still a decade away. And third, with
COVID-19, everyone is thinking through scenarios that just a year
ago would have been unimaginable. No one saw this coming.
Ken Bart: I'm hearing from business
owners who are stressed about the impacts of closure, reopening to
fewer customers, or needing to sell their business in order to gain
access to capital. I'm talking with a few clients about
bankruptcy protection afforded to businesses that will allow them
to restructure to emerge from bankruptcy in a way that protects
their employees and their customers. My partners and I are helping
clients with lease negotiations or re-negotiations, revisiting
agreements with lenders, vendors, and service providers, and
talking through a plethora of employment issues. I have to say, I
continue to be deeply impressed by our business clients and the
creativity and resiliency they display every day. It will take
awhile to get back on even footing, but everyone wants to return to
the pre-virus state as soon as possible.
Businesses in the pandemic are faced with managing a slew of employee-related issues. What issues are you seeing recently?
Bart: We're seeing some employers
struggle with considering downsizing or closing. When downsizing a
workforce or closing a business is on the table, our employment
attorneys advise employers in order to decrease potential employer
liability. For example, companies employing 20 or more employees
are subject to the Age Discrimination in Employment Act, which
protects employees from age discrimination. Likewise, other
protected categories under Title VII of the Civil Rights Act of
1964 (applicable to employers with 15 or more employees) such as
race, gender, gender identity, national origin, pregnancy, and
disability also can create the unwanted appearance and potential
liability of discrimination where there is actually
none.
We also remind clients that, depending on the number of employees
employed, if there is a "plant closing" or "mass
layoff" under the federal WARN Act, there are certain and
specific notice requirements that, if not met, expose businesses to
liability as well.
Harris: I've spoken with clients about multiple employment priorities. One that some owners haven't considered is the need to safeguard key employees who might be sought-after and prone to advances from recruiters. If you have a key employee, now is the right time to be sure that person understands you need them. Business owners are also keenly aware that now is the time to protect critical relationships with vendors and customers, and do what you can to reinforce your company culture, even if some of your employees are working remotely.
This may be a good time to look at expansion for some businesses, particularly in transportation, healthcare, and logistics. What are potential funding strategies for companies looking to expand, acquire an existing business, or to increase working capital reserves?
Bart: This is what I do for a substantial amount of my practice, so I'll take this question. Traditionally, companies would look to a bank for a direct capital loan to be repaid over time. However, there are several alternatives available to companies that require capital to either expand the business, make strategic acquisitions, purchase additional products, or hire employees or consultants. A private offering of equity is a beneficial option for viable businesses that are able to show potential growth and operational success. In addition, while direct stock or unit offerings are a common method of raising capital, for companies that are concerned about ownership dilution, debt offerings, whereby the company conducts an offering raising a certain amount of money through promissory notes or other debt instruments are also a possibility. Some business owners are surprised to hear that if they do not have access to accredited investors, venture capital groups, or other funding sources, they may also hire a licensed broker to act as an underwriter for the equity or debt offering, meaning that the broker would be responsible for securing investors who will participate in the offering.
We touched on remote work earlier. Given that such a large segment of the workforce is still working remotely, what advice do you have to ensure a successful remote work arrangement?
Harris: Managing morale in-person can be
difficult and doing so remotely is a herculean task. We have
recommended normal, weekly video conference check-ins for employee
teams. The most important thing, in our view, is for
leadership to be visible, communicative, and responsive to
employees. People make up their own narratives when they don't
have the facts, so arming your workforce with information is a key
priority for leadership at this juncture.
Bart: Our employment lawyers have spent
months working with businesses on that question. One thing we tell
our clients is to have a written Remote Work Policy in place to
clarify expectations. Having a written progressive discipline
policy in place, and following it, also is important. Also, our
employment attorneys say that providing employees who are not
meeting performance or work attendance expectations with written
warnings is important to help defend against possible claims of
wrongful termination and to possibly challenge an employee's
claim for unemployment benefits.
What are potential exit strategies for companies due to the current pandemic and issues related to COVID-19?
Bart: During the previous several years,
private equity groups have been at the forefront of the mergers and
acquisitions market. Due to the impact of COVID-19, the
mergers and acquisitions market is beginning to shift, with large
private or public companies becoming more active in acquiring
competing businesses in an effort to gain a greater market share
and eliminate competition. I suggest that business owners who
desire to exit their business through a company sale look to their
larger competitors for a potential buyout. One side note....after
helping numerous clients through this process, I have to stress how
important it is to prepare for a potential sale by ensuring that
all corporate books and records, financial statements,
organizational documents, tax returns and other important corporate
documents are well maintained and kept in an easily accessible
location and format. Any potential buyer is going to require a due
diligence process that will involve a thorough inspection of a
company's corporate documents. You'd be surprised how
often businesses don't have that information readily
accessible.
Harris: I could not agree with Ken more.
Often, we on the consulting side are able to come alongside a
company's management team and help them gather and source the
materials they will need to position themselves in the best light
for investment or sale. That's part of the planning we do with
clients that they sometimes don't know they need help with
until the deal is staring right at them, and then they wish they
had more experience getting this pre-funding phase in order.
Clients need lawyers to make the deals happen, and we can help
before the attorneys get involved to smooth that transition and
help management prepare for the change at hand, whether that be an
acquisition or a sale.
You've talked about succession planning and exit strategies a couple of times. What should business owners or managers consider in succession planning?
Harris: Owners with family in the business
may face a number of complexities. A common one is a generational
transition involving children that want to be in the business and
other children who do not. How do you set the business up for
success, but also treat all of the children in an equitable
fashion? This can relate to one of the biggest issues, which is
establishing a clear set of goals for the transition. Business
owners often want to pursue technical or tax-driven transition
methods, but this can often add to the confusion if the goals and
people issues are not clear. If an owner can lay out exactly
what he or she wants to see happen, the right technical answers
will follow pretty naturally.
Bart: We spend a lot of time with clients on
what Hank is calling the technical answers. We help them with
getting a business valuation, negotiating operating agreements and
buy-sell agreements, and advising on issues related to the overall
transition process. We have found that a comprehensive strategy
that addresses both the business transition need and the
owner's estate planning and tax planning needs typically serves
everyone's interests.
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