How the Government Shutdown Affects Business

 

We all know that currently, at least part of the United States government is closed. But in addition to about 500,000 workers out of work, an additional 300,000 are working, illegally, without pay.

During the last government shutdown, a Federal Court authorized a payment to those employees who were forced to work without being paid of twice the amount they were initially owed by the government.

As of this writing, several lawsuits have been filed by Federal employee unions to restore payments to those required to work.

 

BUT WHAT ABOUT …

But what about those businesses and the employees of those businesses that are partially or completely dependent on the government.

These businesses range from government contractors who may never recover the money lost to restaurants that are close to government buildings and depend on those employees for their business.

The shutdown goes further; potentially much further into the business ecosystem.  For example: While the IRS will continue to collect funds, it will not answer taxpayers’ questions. 

And for those businesses and employees that are waiting for tax refunds, while the IRS has stated that they will issue refunds, they have not stated how long it will take during the shutdown. 

On the bright side, if you are due for an audit, no audits will be conducted during the shutdown.

 

WHAT IF YOU ARE TRAVELING, HIRING OR BORROWING?

If a business has an employee that is waiting for a passport, delays are expected, especially where passport offices are in government buildings that are shut down. 

And if you need to hire new employees, that may be a problem.  One of the casualties of the shutdown is the federal E-verify system that determines the eligibility of an individual to work in the United States.

Hoping to get an SBA loan for your business?

Lenders cannot submit loans into the approval que for SBA loans and will not receive loan numbers during the shutdown.

SBA loans are on hold until the shutdown ends.

In past shutdowns, federal workers received back pay.

However, this is not assured because it requires Congress and the White house to pass a law mandating back pay.

 

THE “TRICKLE DOWN” EFFECT …

Consumer confidence is the unknown issue given the shutdown.

For example, a paper provider that does business with a government contractor may lose that business during the shutdown.

If the time-frame extends, the paper company may have to reduce expenses through layoffs, impacting employees that are unrelated to the government. 

And that “trickle-down effect will increase over time.

If a government contractor or even an unrelated business is depending on an IPO or a share offering, the process will be delayed as the SEC cannot process applications.

 

THE HIT TO GDP …

The shutdown could trim at least $6.5 billion a week from the nation’s economic output, economists at Standard & Poor’s suggested. 

“A shutdown affects not only Washington and its employees, but also has ripple effects across sectors throughout the country – from shopping malls to national parks, from contractors to hotels,” said Beth Ann Bovino, chief United States economist at S.&P.

Given that 800,000 Americans have less money to spend and a major part of the government is not spending money at its normal rate, the effect, over time, can be disastrous. 

In addition to the consumer impacts, there are impacts on all sorts of businesses.

 

DEBT SERVICE EFFECTS …

We have written in the past about the high level of corporate debt.

That includes issues like real estate debt for the mortgage holders of buildings rented to the government.

The inability to service debt all sorts of debt from companies that do business with and rent to the government; as well as the impact on consumers unrelated to the government, can begin to impact banks that have made those loans.

Without cash flow from loan payments, new loans begin to dry up.  And the impact continues to spread.

Hopefully this shutdown will be short lived.

If not, the financial impact of this decision will spread well beyond the government employees affected.

 

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at: https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Thank You!

 
 
To all of our referrals, readers, those who have commented on our writing, have reproduced our blogs in your businesses and most of all to our valued clients, a sincere “Thank You” for your participation. We hope that, in some way, we have been helpful in 2018.

As we enter 2019, all of us at Revitalization Partners want to wish all of you the best of holiday’s and a very successful New Year. We look forward to picking up our blog posting after the first of the year.

All of the very best,
Al, Bill and all of our RP Associates

Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. And now, we’ve written a book to help our readers understand the issues facing their businesses. You can find this compilation of our business thoughts at: https://revitalizationpartners.com/we-could-write-a-book/ or on Amazon.

We specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.

Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Sign Here – Lose Everything!

 

In 2017, Revitalization Partners wrote a blog titled “The Payday Loan Industry Moves to Business”.

You can find it on our web site under the “Insights From Our Experience” tab. At the time, these loans had developed into a $35 billion s year industry. CLICK HERE if you would like to read it.

Over the 18 months or so since this blog was written, it appeared that businesses had gotten smarter regarding these loans, one of the largest providers of these loans was unprofitable and we’ve heard less about the problem.

For those who are unaware of these loans, they are typically offered to small and mid-sized businesses by phone, fax or email, offering to have the funds in your bank account within 24 hours.

 

THEIR PITCH IS SIMPLE

The pitch is simple: Fill out the application, sign the personal guarantee and the money will be there.

The funds are repaid daily directly from the business’ bank account.

While this is expensive money, with interest rates ranging from the mid 20’s to as high as 125%, borrowers often see this as the only way to save a faltering business.

 

INTEREST RATES: 32.9% vs. 6%

Our assumption regarding the state of the “alternative financing” business turned out to be incorrect.  In Q3 2018, one of the largest companies in this space generated $648 million in new loans with an average interest rate of 32.9%. 

To provide a comparison, during the same period, their bank loans were at interest rates of 6%.

The November 26, 2018 issue of Business Week contained an article from which the title of this blog is taken.

It cites the case of a family owned real estate business that borrowed $36,762 from a company called ABC Merchant Solutions, LLC after receiving an unsolicited fax promising term loans, up to $1 million, at a low interest rate.

 

THE “CONFESSION OF JUDGMENT” TACTIC …

After making daily payments on the loan and with no warning from the company, the business was denied access to their bank accounts and $52,886.93 disappeared from one of them.

Shortly thereafter, the business went bankrupt. The interesting and sad part of this event was that the owners knew that they had been making the required payments.

As the borrowers soon learned, tens of thousands of other small business owners were being chewed up by the same legal process.

It turns out that these “alternative lenders” are using the New York State court system and an arcane legal document called a confession of judgment.

 

GAVE AWAY RIGHT OF LEGAL DEFENSE …

Basically, contained in the paperwork signed to obtain the loan, the borrower signs away the right to defend themselves if the lender takes them to court. 

Armed with a confession of judgment, the lender can, without evidence, accuse borrowers of not paying and legally seize their assets.

Not surprisingly, some lenders have taken advantage of this.

The Business Week article cites lenders who have forged documents, lied about what they were owed or fabricated documents out of thin air.

 

MANY STATES BAN THEM, BUT NOT …

Confessions of judgment have been part of English Common law since the middle ages.  Many states ban their use and the federal government banned them for consumer loans in 1985. 

But New York state allows them for business loans.

Even though the borrower in this case and the attorney they spoke with was in Florida, the lender and all the loan documents were based in New York.

In this case, the lender took the confession of judgment to a court in Goshen, 60 miles north of New York City.

 

LENDER LIES AND FAST LEGAL CLERKS …

The lender stated that the borrower had stopped making the payments.

This later turned out to be untrue, but by the time the attorney in Florida discovered that, the matter was over.

It was also determined that the confessions they had signed had been altered as the originals contained a drafting error failing to subject the company to the judgment. 

A clerk approved the judgment within 24 hours of the lender requesting it.  To demonstrate the depth of this problem, in July 2018, a single clerks office in Orange County, New York issued 176 judgments against small businesses in 38 states and Puerto Rico.

 

HOW TO AVOID SUCH TRAPS …

As we outlined in our 2017 blog, the way to avoid falling into this trap is to have someone knowledgeable in finance and debt that you can talk with before agreeing to anything that encumbers your business and/or personal assets.  Look closely at the underlined portion of this paragraph. If you don’t know who to talk with, your accountant or attorney can refer you to someone.

If your business is even slightly beginning to show signs of difficulty, ask for help. Thus far, during 2018, Revitalization Partners has arranged $35 million of refinancing for companies that for one reason or another required assistance. If you don’t wait until it’s too late, there is almost always an alternative to an “alternative lender”.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

Why Private Companies Need Advisory Boards

 

Growth in private middle market companies often is constrained by the lack of “diversity of experience” in the company.

Often, the company is a family company with management comprised of brothers, sisters and other relatives who share the same experiences, knowledge and culture.

While often this can be beneficial to the growth of a company, the downside is that if you always do what you have always done, you will get what you always got.

 

WHY COMPANIES DON’T HAVE ADVISORY BOARDS …

It is estimated that less than 5% of middle-market companies have an established board or advisory board.

The primary reason for such a low percentage is that small and middle-market businesses believe they are savvy enough not to need a board, think it would be too expensive or would constrain their decision-making.

With the demands on CEOs – including regulatory changes, pressure from family and other founders, the rise of new competitors and business models, and the need to transform businesses at an ever-quickening pace – it may be time for borrowers to get new expertise and insight by adding one or more outside directors to their board.

 

A RECENT SURVEY SHOWED …

In a recent survey conducted by Statistics Canada, private companies with advisory boards with outside members produced the following results:

>> Sales growth was stronger after instituting an advisory board. In the first three years after an advisory board was set up, sales grew 66.8% compared with a growth of 22.9% in the three previous years.

>> Productivity growth also strengthened after the advisory board was introduced. In the three years after the advisory board was set up, productivity rose an average of 5.9% compared with 3.2% in the previous three-year period.

Banks and Asset Based Lenders may prefer clients with active boards because:

>> A board driven company is less apt to get into legal & HR trouble, saving legal expense and reducing employee turnover.

>> A board driven company may pay less for D&O insurance due to reduced risk.

>> ABL lenders normally lack adequate cash flow thus depending more on collateral values and the abilities of management.

 

AN ADVISORY BOARD OFFERS …

Management risk is generally lower in companies with boards.

An Advisory Board provides counsel, advice, contacts, professional skills and experiences that typically go beyond that of the company management team in areas like industry practices, sales, operations, strategy, financial, marketing, technology, investment, intellectual property, or human resource expertise.

Advisory Boards are informal brain trusts and have no governance or fiduciary responsibility. They are solely focused on helping the company achieve its goals.

Many private companies prefer an Advisory Board so that no control is ceded to non-owners. 

Advisory Board members can offer perspective on everything from making introductions to sources of financing to targeting niche markets and forming partnerships with market leaders.

 

DON’T FILL YOUR BOARD WITH …

Senior executives with diverse backgrounds can bring an enlightened, unbiased perspective.   Borrowers should avoid a “vanity board” full of luminaries – they typically end up being purely window dressing and neither productive nor useful.  

A Board needs to be populated by those with contacts helpful to the business, the will to exercise their skill and knowledge to grow the business and a firm commitment to see it through.

Bringing on golf partners, book club members, neighbors or family members may be easy to do but they must be able to add real value.   Experience suggests it’s best to avoid this scenario altogether.

Advisors should serve as a sounding board for assessing new offerings, markets and opportunities.

 

WHEN PROPERLY SELECTED …

Properly selected, their knowledge base can help accelerate growth. They can also introduce greater corporate accountability and discipline.

If the strategy needs attention, advisors can provide fresh thinking and counsel on planning the development of the business. They’ll also tend to create a sense of accountability for the senior team’s execution.

Is functional expertise missing in Sales, Marketing, Operations, Finance or Human Capital Management? The right Board member(s) can provide the lift to cover that ground while a search for the right professional is conducted.

Often, a Board can enhance credibility with industry, vendors, customers or investors. Simply featuring Advisors prominently on a website and letterhead can give a leg up on the competition.

The firm will enjoy an enhanced image among a broad range of constituencies.

 

HAVE THEY “DONE IT BEFORE?

A Board consisting of thought leaders who have “done it before” will be able to ask the right questions to determine how to leverage the company’s strength into accelerated growth. 

Advisors may also introduce untapped communities of interest to expand business development opportunities.

When considering a new market or new territory, Board members with expertise in those areas can be of great assistance in helping to crystallize thinking and providing skilled guidance.

They can also offer knowledgeable input on market changes and industry trends. 

Further, their input on marketing performance and ROI can be invaluable.

A Board can also help improve the ROI of the senior team. A new or inexperienced CEO can look to the Board to help expand leadership and managerial skills.

A properly selected group of advisors who have “been there, done that” can help anticipate and avoid costly mistakes.

 

DO YOU HAVE AN EXIT PLAN?”

Most small business owners expect to eventually sell their firm or merge it with another company.

Planning a liquidity event can be complex and daunting.

The right Board can help prepare for and execute the transaction, achieving the best possible return.

After all, isn’t that why the business was created in the first place?

If the business is to be passed on to the next generation, an Advisory Board can help address sensitive issues like sibling rivalry and individual agendas.

Board members can also help evaluate the capabilities of family members for succession planning and facilitate cross-generation communications.

 

FOR BEST RESULTS …

Boards can remove emotion from the decision-making process and smooth leadership transitions from family to professional executives.

Owners should think through the type of knowledge, experience and relationships that would add value to the firm.  

Then craft a profile of the ideal board member to be circulated to executives who are excellent prospects and asked for feedback.

For best results, work with an advisor who has built successful boards for other firms.

That will accelerate the process and attract great candidates.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

“Culture Eats Strategy for Breakfast” – Peter Drucker, Part 2

 

We have many years of experience working with companies and leading the effort to change corporate cultures.

Over the years, we have learned that there is a direct correlation between the culture of a company and its operating performance and related profitability.

Our experience confirms the well known theory that positive corporate cultures are an integral part of improving performance of a company.

In fact, a Deloitte research study, reveals that 94% of executives and 88% of employees believe a distinct corporate culture is important to a business’ success.

Deloitte’s survey also found that there is a strong correlation between employees who claim to feel happy and valued at work and those who say their company has a strong culture.

 

SOME IMPRESSIVE METRICS …

Research conducted by Queen’s University in Ontario, Canada, shows that companies with an engaged culture experience a number of positive attributes including: a 65% increase in share-price, 26% less employee turnover, 100% more unsolicited employment applications, 20% less absenteeism, 15% greater employee productivity and 30% greater customer satisfaction levels.

While the research confirms our experience, it’s helpful to review several real-world cases where we have managed a change in corporate culture.

 

REAL WORLD CASES …

In one situation, we were asked to step into the CEO role of a company that lacked leadership. The former CEO was a very inexperienced leader and managed by committee.

The strongest personality of the group made most of the decisions solely based on what was good for that individual.

The individual had a dominant personality and demanded that the company’s personnel spend time on his projects, regardless of the impact on managers in other areas of the company.

He browbeat any employee that did not meet his ever-changing demands. A culture of fear was dominant throughout the company.

Given that the dominant individual produced a significant portion of the company’s revenue, there was fear of confronting the individual as he might leave the company and as a result, revenue would decline.

 

OUR TASK WAS TO …

Our task was to address the issues and make the necessary changes to improve culture and the profitability of the company.

As part of this process, we addressed the culture issue head on, outlined our expectations and created a culture of accountability with the management team and the company.

During the first few months of our tenure, we worked with the management team and employees to set objectives, reinforce positive behavior and continued to address situations where negative behavior was observed.

As part of that process, the dominant individual was terminated based on continued negative behavior.

This event was the confirmation that employees needed to really understand that the culture had changed.

The company is now running much more smoothly, is on the way to improved profitability, and has attracted a number of highly qualified new employees that are integral to its growth strategy.

 

A DIFFERENT SITUATION …

In a different situation, we were asked to step into the CEO role of a large international company that had experienced several years of profit decline.

The company was managed by a group of individuals with no designated leader. The group was responsible for making day to day operating decisions, however they were only made by committee.

In other words, if the group could not reach a consensus, a decision was kicked down the road. As a result, it was difficult to makes changes to the business, since no one could completely agree on what needed to be done.

The decisions that were made, were driven by individuals that lacked perspective of what impact they might have on the entire company.

The end result of this process was that important changes were never made, and the company’s fragmented management approach was driven down to all levels of the company.

 

AGAIN, OUR TASK WAS TO …

Again, our task was to change the culture of the company in a manner that would bring unity and improve profitability.

Upon taking the leadership role, we quickly assessed the strengths and weaknesses of the company, outlined and communicated a clear set of objectives and timeline throughout the company.

A new compensation program was established to reward managers in every area of the company, if the company as a whole achieved its objectives. During the process we met frequently with each area of the company reinforcing the objectives and assessing progress.

A major cultural change was working with managers below the executive ranks and reinforcing the fact that we wanted the company to work together to change the culture and to accomplish its objectives.

The final result was that the objectives were accomplished earlier than was expected, the company significantly improved profitability and the management team, for the first time, received bonuses for their contribution to the effort.

 

CRITICAL STEPS …

Changing the culture of a company is hard work. In many cases a disruptive culture had been in place for a long time.

Clearly communicating the changes that must be made, involving the entire company as part of the process, and rewarding the group when objectives are accomplished, are critical parts of the process.

There are many examples where corporate cultures have been changed, however, there are many more examples where companies have not successfully addressed these issues.

In those situations, the company puts their existence at risk, not only for the employees, but also for the shareholders and/or family members who have a significant share of their wealth invested in the company.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

“Culture Eats Strategy for Breakfast” – Peter Drucker

 

Over the past 15 years we have worked with many companies in every type of industry and with a wide range of revenue and level of profitability. 

In virtually every situation, we were asked to help our client improve operations and profitability.

While our approach includes a number of tasks, one of the most important things we focus on is corporate culture. Corporate culture is the foundation by which any company operates.

Our experience includes working with clients that have many different types of culture.

We have learned, however, that there is a direct correlation between the culture of a company and it’s operating performance and related profitability.

This relationship is extremely important and we are devoting the next two blogs to this topic.

This blog post will discuss the cause and effect of a bad culture and how it negatively impacts companies. Our next blog will discuss the elements of a productive culture and how it contributes to the success of companies.

 

“CULTURE” DEFINED …

It is important to look at the definition of an organizational culture.

In a paper published in the Academy of Management Journal, in 2006, Ravasi and Schultz characterize organizational culture as a “set of shared assumptions that guide behaviors.

It is also the pattern of such collective behaviors and assumptions that are taught to new organizational members as a way of perceiving and, even thinking and feeling.

Thus, organizational culture affects the way people and groups interact with each other, with clients, and with stakeholders.

In addition, organizational culture may affect how much employees identify with an organization.”

 

BAD CULTURE WILL  …

Inherently, bad corporate culture ultimately leads to poor performance, operating losses and sometimes the failure of a business.

Some cultures can be labeled negative or toxic and originate from a leader, management team or a management style that promotes an environment that every person should fend for themselves.

There is typically a heightened sense of individualism and an environment that encourages individuals to get ahead at the expense of everyone else.

Management typically encourages conflict and promotes a combative style of behavior by encouraging an “Us versus Them” mentality.

 

ANOTHER EXAMPLE SKILLS …

Another example of poor company culture we have found in troubled companies, is a situation where there is a void in leadership.

The company typically does not have a clear leader and the management group is incapable of making even the most basic decisions.

When decisions are made, it is by group think and is often a compromise instead of making the best decision for the business.

Furthermore, no one is responsible for looking at the big picture and setting strategy even for the near-term operations of the business.

This results in a lack of clarity with the middle and lower level management of the business.

The end result is a lot of people wasting time on tasks that really do not move the business forward.

 

6 EARLY WARNING SIGNS …

There are many more examples of poor company culture, however, we would like to highlight some early warning signs of a bad culture that if recognized, should result in rethinking the approach to the current cultural environment.

Poor management and leadership
• Lack of empathy
• Micromanagement
• Low office productivity
• Poor internal communication
• Lack of Discipline

When working with a company, we look for one or more of these warning signs early in the process. If they are prevalent, changing the culture becomes a critical element in developing a plan for improving operations.

 

IS YOUR CULTURE EFFECTIVE?

These issues are addressed early in the process and checkpoints are established along the way to assess if the culture is changing.

Ensuring that the cultural change is occurring is an important benchmark and contributes to the success of achieving our objectives.

No company’s culture can ever be perfect.

Our experience, however, in working with many companies, reflects that working toward an effective corporate culture will result in a more productive and profitable business.

Our next blog will focus on the attributes of an effective corporate culture and how it positively impacts a business.

 

Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.