How your Small Business can Survive and Succeed in Tough Economic Times

Posted on January 15, 2014

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Don Looking Up Framed

HOW YOUR SMALL BUSINESS CAN SURVIVE AND SUCCEED

IN TOUGH ECONOMIC TIMES[1]

I.        INTRODUCTION.

We business owners are groomed and have a mental mind set to grow, to add, refine and prosper. Down-sizing, quitting something, letting people or things go is not part of our vocabulary. “Winners never quit and quitters never win.” That’s our attitude. And it serves us well, most of the time. But downturns are different. We have to play our game backwards, to function on rewind. Many of us are not very good at that. But, one thing the experts tell us – actually, two related things: (1) Many successful people, who are household names, have experienced failure and even bankruptcy (Henry Ford for one I believe) and this was at a time when bankruptcy was considered “morally wrong,” not a strategic option, as it is today. And, (2) we can learn more, or at least as much, about our business on the way down than during a growth phase because bad times “magnify” our practices. For example, during this recent downturn in my law firm I learned that our time and billing procedures were leaking “money like a sieve,” which was not apparent when times were good.

So here are some hints l have learned during this “Great Recession.”[2] 

II.      DENIAL AS A FRAME OF MIND.

First and foremost, success during hard times is not so much a matter of knowledge, or skill – or even character – as it is acceptance. What I have seen in both myself and others is: denial. Here, by “denial” I mean not seeing, processing and taking the dramatic actions needed to deal with the situation – in a word “coasting.” What happens is that each day creeps in its petty pace into the next. The assumption or ‘method’ as Scarlet O’Hara said is that “tomorrow is another day.” Well, it is another day, but nothing new is done. So, as Einstein, among others, said (to paraphrase): “Only a fool repeats the same things and expects the outcome to be different.” So, denial makes fools of us all. For example, back when I had a tremendously successful retail store. I opened a second one. I should have closed it in six weeks. But I kept it open; thereby experiencing $150,000 in operating losses before closing it. Thus, I still took the investment loss, i.e. capital loss on the store and lease buy-out on top of the operating losses. I made a bad thing worse by “hanging in there.” I am not saying that we should “bail early,” but that we should know when to bail. To quote Kenny Rogers: “To know when to hold ‘em and know when to fold ‘em.” I was raised to “have what it takes,” but I learned the hard way that “having what it takes” does not mean ‘banging your head against a wall,” in the same old way; it allows for a change of strategy and course of action.

What to do: time and again in my consultations re business formation, or operating agreements, or partnership disputes I tell my clients that “You may not have been in this business situation before but you may have been in several, and several kinds of, personal relationships. You can apply what you know from your personal life to this situation. For example, lack of customers is a relationship failure. When we have a personal relationship failure what do we do? We think about how we can do better; we talk to trusted friends for objective advice; we may seek counseling; we may call a lawyer. So, here, do the same things you would do in a personal relationship and (but) do it early. Because of the “denial problem,” described above, often what I see is that the “patient is dead in every way but pronouncement” by the time the business comes to me. This will not work.

The cure for denial is “proactivity.”   And, here is some incentive for you. Instead of the “emergency operation” initial fee of $10,000 to start or defend litigation, the cost of early consultation and advice may be a little as $500.00. And, you can proceed with a plan (instead of your head in the sand).

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III.     ACTION: THINGS TO DO.

OK, let’s hope that I have convinced you to act proactively and to start early in your response to hard times. What are some of the things that you can do? General rule of thumb: If it is counter-intuitive and you really don’t want to do it, so want to put it off, then that is probably it (or one of the “its’’). Here are some examples:

A.      CASH FLOW MONITORING (down and dirty)

1.      Calculate your breakeven point. How many dollars you have to take in (cash in hand) to pay bills.

2.      Watch your cash: Monitor your cash daily. My first and best accounting system, taught to me on my first day of business by a bookkeeper:

Beginning cash,

+ Cash in (sales or receivables paid)

-Cash out (refunds, bills paid, payroll, expenses, etc)

End cash.

3.   Take the steps necessary to keep cash positive. (SEE B. DECISIVE ACTION Below).*

Follow this simple system and keep your cash above zero and you will never go broke.

B.      *DECISIVE ACTION

If you are like many businesses, especially those completely caught off-guard by the size and swiftness of the recent economic downturn, by the time you realize how bad things are, you may barely have enough cash to cover payroll, let alone to pay rent and other expenses. But, knowing your breakeven point and daily cash balance will tell you what to do next. Obviously, you need to increase sales and/or cut expenses. But probably, you have already tried things on the sales side (e.g. in house incentives and special “package pricing” for customers) and such actions were not sufficient to turn things around. This leaves the hard stuff, i.e. cutting expenses.

What do you cut? Well, what are the big dollar items? Most likely, payroll, rent, and for some businesses equipment or advertising. Scrutinize these areas.

PAYROLL: Often growing businesses pay a number of well paid sales people. You may need to reduce sales staff, e.g. to have only one or two sales persons working on a lower commission but making about the same money (or at least an acceptable amount) instead of three or four sales persons all of whom are starving. (Hopefully, as part of your “Legal Brick House,” i.e. legal organization, you will have non-competition agreements in place that at least keep your talented, but superfluous, sale person from stealing your clients. [3]  If not, call your business lawyer for a consultation.

There are at least three cases where a business lawyer is really valuable: 1. Formation, 2. On the way up and 3. On the way down.[4]  If I were to name one overriding fault that I see business owners make (that keeps them small) it is the underuse of professional expertise. Larger businesses use and take it for granted that they need to use lawyers, accountants and other experts. Small businesses don’t (they would rather buy a boat).[5]

Notice that I mentioned both cutting the number of personnel and their pay. If you want to see capitalism and the instinct for survival at its best then terminate fixed pay for any income producer and pay only a commission of what is both sold (billed) and collected.  Instead of having to nag the lawyers or others to get their time in, bills reviewed, monies collected, etc. the commission workers will now be “right there” with both their time and the money. It is a beautiful thing to see. Notice that it helps both sales and collection and goes right to the bottom line as cash flow.

The Law Offices of Donald W. Hudspeth, P.C.

RENT. If the business is in a downturn, not only may it be necessary and proper to cut personnel and payroll, but also to reduce space rented. This means talking to the landlord. (And, again, consultations with your accountant and lawyer re cash flow and the terms of the lease are advisable.)

Clients often forget that, while their problem may be unique to them, i.e. first time, only time, to us, i.e. the law firm or accountant, the problem may not be unique. We may be handling a number of clients with similar problems. Thus, we may have some valuable knowledge and experience, not just in general, but based on the same circumstances as you have.) For example, during most times, especially good times, and except for a proven non-performing space (like bad location), landlords were extremely hesitant to re-write the terms of the lease, especially where, in a popular location, the landlord had a stack of other applicants wanting to be in the mall, office building or industrial center. Thus, in good times our negotiation strategy with the landlord was to negotiate a buy-out of the lease. This worked because the landlord could get, say, 2-4 months’ rent as a buy-out of the lease and re-rent the premises the next month. I am exaggerating but the point is that the landlord could make money in a buy-out.

Today, in these economic times, what we lawyers have learned, and the client may not realize, is that due to the hard times new potential tenants are NOT lined up to take the space. New tenants, especially, at the old rent level, may be nowhere to be seen.  Thus, a buy-out may not be easy to do because even with a favorable buy-out the landlord still faces the negative prospect of the space just sitting there empty for a year or more. So, no matter how good the buy-out, the landlord may rather have the tenant and have more incentive to sue to get the rent to the end of the term. (In the buy-out discussed above the landlord has a duty to mitigate damages by attempting to release the premises. This duty prevents the landlord from just sitting on re-leasable space to collect rent from a good tenant.)[6] But, during bad times the landlord can list and advertise the premises with no takers; thus, the duty to mitigate does not prevent the landlord from demanding rent to the end of the term or, at least, for a longer buy-out period.

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In an economic period like we have now the landlord may be inflexible as to termination of lease but very flexible as to renegotiation of lease. In this economy market rents are off 30 to 40% so the landlord faces a reduction of rent whether it is paid by you or by a new tenant. And, you are here and certain; the new tenant is not. For these reasons it is not unusual to negotiate a rent reduction (i.e. reduced price paid per square foot of space), say $20.00 per sq. ft to $16.00 per sq ft.) and a space reduction (cut back in the number of square feet of space rent reduction. I have seen rent reduced to less than half of the amount due under the present lease.  Landlords are hurting too and cash is king. Many commercial landlords would rather have “$4000 a month instead of $6000” than “$00.00 instead of $6000,” especially where the space may sit empty for years. (Rental space is like an airline seat. Better to sell a $300 seat for $100 than not sell it at all.).  

WORKOUT PLAN. By ”workout plan” I am talking about a non-bankruptcy negotiation with creditors based on the (i) timing of payment and the (ii) percentage of payment. Like a Chapter 11 reorganization bankruptcy debts can be paid in classes. For example, creditors who are will to take, say, 15% of the amount due as full payment will be paid “immediately,” in, say, 20 days, while creditors who want full payment will be moved to the end of the line with payment in, say, six or nine months (therefore they have a much greater risk of getting zero.)

Of course, the creditors know they can ignore the plan and just sue, but this would create the proverbial “race to the courthouse” where the first to sue gets paid and everyone else gets nothing. And, litigation may be questionable under a “cost benefit” analysis because the creditor may incur substantial attorneys fees and costs for little or no return. Even where the firm uses a collection attorney who works on a percentage of recovery (“contingency”) the numbers still have to work. The law firm will hesitate to do $30,000 worth of work “on the come” where the expected recovery is less than that. All of which means that if the recovery looks relatively certain and “reasonable” under the circumstances (likelihood of recovery and cost to recover, time period, etc.) the creditor may accept payment under the workout plan.

The above is the “good news.” The ‘bad news” is that work out plans are relatively expensive, say $5,000 and up, so can cost more than a Chapter 7 or 13 bankruptcy. For this reason work out plans are often not an option because the client has exhausted its economic resources and is not in a position to pay these fees. But, where the client is not “so far gone” the workout plan has some major advantages, including avoiding bankruptcy, which can hang around on the credit record for ten years, the possibility of bankruptcy in the future (which for a Chapter 7 is typically prohibited for seven years once a chapter seven has been filed), a better credit record and perhaps on-going relationships with critical vendors who could be lost in lawsuits or bankruptcy.

 Framed Copy of hudspeth1

IV. CONCLUSION.

     The above is just a list and discussion of some atypical things you can do. Obviously, there are others, which you may have thought of and tried. The two main points here are:

(1) Avoid denial; that is recognize that you must take drastic action and

(2) Use experts because they have “been here” many times before with other clients and may have options that would not think of  (for one reason because you have not been here before.  

Your chances of survival and success may be much better than you realize. So, don’t give up and call your business lawyer. [7]


[1] You do not have to be in dire straits to benefit from this article. Any small or medium sized business (“SMB”) or owner-operated business can benefit by learning from others’ mistakes. Knowledge is power and understanding where you can go, if you must, is useful knowledge. .

[2] This article is not intended to be complete or all-inclusive. It is not even intended to be the opinion of an expert, which I am not. I am only sharing information as part of a “conversation.” Take any and all of this – as with all of my articles Online – for what they are worth.

[3] This is but one example where “$1,000.00” upfront in legal costs can literally be worth $1,000,000.00 in lost sales later (I have seen in happen to just that extent). Think about that then call your business lawyer to do things right, i.e. smart, i.e. “brain >> brawn.”

[4] This is what I call my “skyscraper speech.”  The high rise office buildings around my office are filled with accountants, lawyers and marketing people, among other experts. The buildings are filled with lawyers and other experts because people use us. And, they don’t use us because they like us – or even because they want to – but because we bring value to the deal.

[5] Excuse me for being grumpy but it gets a little old to see the same serious, life-altering, and simply-avoided mistakes made over and over again.

[6] The landlord will always demand or sue for the “$120,000.00,” or whatever amount is due on the lease but as a matter of law the landlord has the duty to avoid unnecessary damages (aka the “duty to mitigate damages”) by actively marketing and attempting to re-lease the premises. And, during good times these steps are usually successful, so the landlord knows that it can re-lease the remises after a few months.

[7] Unfortunately, you may need to call and interview more than one. Clients tell me that they went to a “business lawyer” who didn’t know what to do. In my humble and biased opinion if they do not have a background in business before becoming an attorney, especially in small business, they may just not “get it.” (A lawyer for a big corporation can be practically worthless for a small business owner.)

The Hudspeth Law Firm

“The Business of Our Firm is Business”

602.265.7997 – http://www.AZBUSLAW.com866.696.2033

Business Law – Commercial Litigation – International Business Law


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