Recently, KeyBank surveyed 400 middle market business owners and executives on their expectations surrounding a potential economic downturn and the implications for their businesses.
Nearly 70% of these companies are expecting an economic downturn in the US, of those, approximately 30% expect the downturn to take place in 2019 while approximately 40% expect the downturn in 2020.
Not surprisingly, most middle market companies expect the next economic downturn to have a negative impact on their business. About 20% do not expect any impact while another 20% think a downturn could be a positive impact.
ALREADY TAKING STEPS …
Given that most middle market companies expect a downturn to hit soon, two-thirds are already taking steps to safeguard against it.
Most commonly, businesses are looking to reduce expenses and improve their operational efficiencies and productivity in an effort to counteract revenue losses. They are also looking to identify new markets and products to offset decreased revenue from their current product and market mix.
Increased operational efficiencies are a major focus perhaps because of the perceived threat of the economic downturn, but they will help regardless of what happens with the economy.
INCREASE LIQUIDITY & LOWER COSTS …
Beyond efforts to enhance operational efficiencies and identify new markets and products, over a third of mid-market companies are increasing liquidity, as well as searching for lower cost suppliers of raw materials.
Companies with higher revenue are most likely to be taking action now, both focusing on reducing costs of sales through both lower cost suppliers and reductions in headcount.
Interestingly, approximately 80%of mid-market business owners and executives remain optimistic about the outlook for their own company over the next 12 months.
Considering that 70% of companies are expecting an economic downturn by 2020, this optimism may speak to the actions they have taken to safeguard against a downturn.
THE KEY QUESTION IS ALWAYS …
At the individual company level, the question is always: Were the right steps have been taken to protect the company?
Revitalization Partners recently was approached by a company that was having difficulty with their banking relationship. The company’s strategy for growing through the downturn was to grow revenue by acquiring similar companies using debt and use the increased revenue and profitability to be able to service the commitments on these loans.
As revenue slowed due to seasonality and in 2019, the weather, this company was unable to meet its loan commitments.
The company approached RP to assist them in staving off the bank while they completed additional acquisitions to improve their ability to service the debt.
In addition to the millions owed the bank, the bank also had a block of mezzanine debt and additional unsecured debt to various members of the company.
Given that they had violated bank covenants multiple times and the bank had communicated that they would not allow this to continue, the company did not have sufficient time to refinance its debt. As a result, we were unable to assist them.
THE MOST IMPORTANT ACTIVITY …
While the importance of developing a strategic and tactical plan for a potential downturn cannot be overstated, one of the most important of these activities are that your company is aligned with the right bank for your organization.
All banks are not the same and the bank that is happy to sell you money and services when things are going well for your company, may not be the right bank for the time the downturn occurs.
We recently were involved with a client that had developed a strategy to weather the downturn by the acquisition of another company that provided very similar goods and services, but to a different market segment that expanded the combined company’s capability.
WHEN ARRANGING THE CREDIT LINE …
When arranging the acquiring company’s line of credit, the company discussed the fact that they had a plan for this strategic acquisition and the bank assured them that the necessary funds would be available.
At the time of the acquisition, a few months later, the company was informed that the acquisition loan would not be available due to a “change of policy” by the bank.
Fortunately, the company was sufficiently well capitalized to be able to complete the transaction.
DEAL WITH THE RIGHT PERSON …
The above scenarios point out that not all banks are truly “business banks” and underscores the importance of talking about the execution of your company’s strategy both when things are going well and when a downturn occurs.
And most important of all: Regardless of the title on the business card, make sure you have had the opportunity to fully explain your company’s strategy to the person at the bank who’s going to review and approve your banking transaction.
Remember, in the State of Washington, verbal agreements regarding the lending of money do not have any force of law.
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.
