The face of the American economy is forever changed by this coronavirus pandemic. In three weeks’ time, we’ve witnessed financially viable companies go into rapid freefall by the millions, starting with employees and trickling rapidly. Small to mid-sized businesses are laying off in record numbers, and there is no clear end in sight. With the spread of COVID-19, people are being asked to choose between their livelihoods and their very lives. Businesses are pairing down to “skeleton crews,” keeping just enough workers on board to get by and doubling remaining employees’ duties. Never before have we realized just how interconnected we all are in our quest for survival.
Although so many are in the same boat, businesses that prided themselves on having a good credit standing will now find it more difficult to negotiate lines of credit or to have contracts and lines of credit reinstated once things begin to normalize, save for some debt forgiveness programs and financial incentives being granted through the federal government’s CARES Act.
The late Jack Welch, who held the position of chairman and CEO of General Electric, worked hard to eliminate bureaucracy and increase growth for General Electric. He was known for firing unproductive managers and eliminating whole divisions within his company, and then acquiring other companies and driving them to better management and increased profits — a true master of corporate structuring. Warren Buffett, as chairman and CEO of Berkshire Hathaway, has built his fortune not investing in companies but investing in management teams.
The late Jack Welch was once quoted as saying, “This whole game of business revolves around one thing. You build the best team, you win.”
This quote may sound overly simplistic during such uncertain times, but I can break down how it applies to all of us, the future of our financial health and our economy. The America we once knew is forever changed. I believe hundreds of thousands of businesses will be lost throughout the United States. I further believe and estimate that certain industries will become obsolete; however, new ones will be created.
There are certain industries that thrive in tough times, perhaps due to some of the foils of human nature. Let’s first take note of these. Companies that will thrive during this pandemic will most likely be within real estate (investors and would-be investors love a buyer’s market), liquor and tobacco sales, firearms sales, streaming entertainment, sectors of law that deal in financial hardship (think bankruptcies and foreclosures), virtual meeting software, healthcare and banking.
The last one may come as a shock. After all, if people can’t make their payments, how can banks thrive? As someone who has built a career on obtaining capital for businesses and bringing businesses public, overseeing mergers and acquisitions, and investing as a private equity investor in many companies, I have found that, much like casinos, “the house always wins.” Banks come out on top because they are brilliant at transmuting and consolidating, and when all else fails either calling in loans or bundling and selling them to Wall Street. In the coming six months to a year, we will see banks call the loans that appear to be weaker bets and extending new loans to much stronger companies. Therefore, companies with weaker margins will find it harder to survive in the climate that is to come, but companies with solid margins and strong infrastructure will grow in strength at the end of the COVID-19 bell curve.
Conversely, industries like travel, hospitality, brick-and-mortar retail, brick-and-mortar consumer services, locally driven services that require face-to-face social interaction, and manufacturing will suffer the most during this time. Apart from necessities like food, medication and certain sundries, consumers are now buying less goods and services as their financial insecurity and anxiety grows along with massive loss of income.
As of April 2, 2020, a record 6.6 million Americans filed for unemployment, an unprecedented figure. This is fertile ground for private equity investors, hedge funds and venture capitalists to reap the benefits of undervalued assets. This can create a huge opportunity for private equity investors, venture capitalist firms and hedge funds. They can boost the economy by investing their monies into struggling and failing businesses and gaining a substantial stake in new and emerging industries.
Many businesses that rely on self-financing or “self-funding” will begin to falter as personal financing dries up. In addition, many Americans will be scaling down the brands they have always used. Chain stores and large franchise stores will have a better chance of making it through this storm. We are going to be looking at a new world and a new economy in a way that our country has not experienced since the 1930s.
The good news is, we will witness the birth and growth of emerging industries, as this decade and century progresses, much like the horse and buggy gave way to an automotive industry. Companies will be able to work more efficiently due to AI and robot technology. There will be a significant streamlining of support staff, while mathematic, scientific and maintenance staff will be needed to service artificial intelligence and robotics-based devices.
China’s economy has also impacted our world in ways that the average American is not directly aware of. We owe China what seems like an insurmountable debt; a byproduct of the Great Recession of the late 2000s. During this time, China bought up a great deal of American debt. I do think, because of the coronavirus outbreak, our federal government stands to re-negotiate its debt with China. Our leverage point is that the United States economy cannot collapse because we are the largest economy in the world and every other economy is dependent upon it.
HOW WE BRACE FOR FINANCIAL IMPACT AND MINIMIZE THE FALLOUT
Communicate with creditors and debtors. Businesses will need to explain where the company is, discuss options and re-negotiate terms if they can. They can inquire about extensions on payment terms, request waivers of late fees and penalties. The good news is, “You are not alone.” Tens of millions of people are currently in the same boat and the creditors know that. In many ways, this puts individual businesses in the driver’s seat to renegotiate payment terms and obtain some forgiveness on penalties that would normally be imposed. At the same time, they should communicate with their company’s debtors and diligently collect monies owed to them — while being prepared to negotiate with customers and accounts who owe them money.
Businesses should reach out to the current customers they do business with to gauge where they are at and offer discounts and other payment incentives to get whatever liquid money they can upfront. For example, if a customer owes an outstanding balance of $1,000, the business could make them an offer to pay $700 now to settle the account. This will give that business much-needed cash in hand. Regarding new sales, companies should be all about solving customers’ pain points right now.
Identify pain points and solve them. Businesses should identify customer or client “pain points” during this time and strategize ways to solve them in a way that could potentially make their business indispensable during a time when most products and services will be cut from the equation — whether that is free delivery, discount packages, future incentive packages, extra services or penalty-free rescheduling. The old playbook no longer applies; it’s time to become flexible in the business’s approach. If possible, businesses should extend more favorable payment terms to gain more market share within their industry.
Form strategic alliances. Companies should also look to industries that are thriving and communicate their desire to align and/or partner with other companies to leverage profitability, innovation and market share. This means seeking out companies that offer complimentary products or services and reaching out to see how to help one another. We are living through times when people are more emotionally receptive because, no matter the industry any of us is currently in, we are all feeling vulnerable right now. Entering into a strategic partnership with another company could mean selling a part of one’s company or even acquiring part of another company. A partner may have the ability to loan one capital in exchange for equity in one’s company. Or this could mean extending a sweetheart deal on something one usually doesn’t offer such favorable terms on. These ideas should be discussed with a mutual respect and understanding of the parties’ respective industries, needs and goals, and the current marketplace in which they are operating.
One type of partnership is a joint venture. Those who decide to merge with another business in their own industry to combine assets and resources are going to need to consolidate and cut costs. For example, Company A may have a stronger sales team, but Company B has a better administrative team. Consolidating those resources would be to keep Company A’s sales force and Company B’s administrative team — cutting costs down because the companies are working together and trimmed the fat. This is one of the most strategic partnerships that need to take place right now.
Another type is equity investment, in which a private equity investor comes in and either makes a loan of capital or invests capital into a company. This means a business is loaned money in exchange for equity in that company. A private equity investor may extend a line of credit to help the business survive this climate. Business owners don’t pay back an equity investment in traditional terms, but will find their ownership stake shrinking, perhaps considerably. The good news is that the equity investment would likely outweigh the loss. One thing to consider during economic downturns is that private equity investors will look for terms that favor their investment. This is because the higher the risk for the investor, the more that investor is exposed financially, the more the terms will be slanted to cover that risk.
A third type of partnership is achieved through acquisition, in which a smaller business is acquired by a larger business that has the financial wherewithal to support the smaller one and keep operations afloat during this period of time and places a strong bandage on the current uncertain marketplace. The smaller business will not be in such dire need of immediate profits to stay alive or to plan its future trajectory. It can also maintain its marketing and advertising efforts and continue to grow market share without immediate profits but with the future projection of profits.
Streamline efforts with technology and outsourcing. Can I have my workforce work remotely? Can I outsource my marketing and advertising team? Can I streamline my administrative with technology or keep my workforce intact but teach them how to be more efficient with the use of technology? These are some of the questions business owners must ask themselves during this time. Businesses may find out through an efficiency audit that 20 percent of the workforce is doing 80 percent of the work. With that information, they can pivot their efforts and infrastructure accordingly. This is an opportunity to become more efficient and more profitable in the long run.
Keep your eye on fall 2020. Companies can use the spring and summer months to position themselves for an autumn boom, if they take the right strategic steps.
The financial effects of COVID-19 will be felt long after the pandemic is under control. We will feel ripples and aftershocks well into 2021 and perhaps throughout this decade. This means that business as usual is a losing proposition. Our economy will recover, albeit with a different spin than before. We will see a rise in consciousness about the way humans treat and consume animals, and we will begin to shift toward more of a cause-and-effect mentality. This means industries that exploit animals for profit will begin to recede. Virtual networking and virtual meetings will become more and more commonplace, and the traditional sales meeting or boardroom meeting will happen less frequently. We will also come back together and socialize in slightly different yet distinctive ways, with a return to more community-based activities. Local parks, places of worship, board games and general fellowship with one another will be newly discovered and offer a newfound charm.
Employers will also become more accommodating of remote workers and flexible schedules, and will be more accommodating to sick leave and other dispensations that support employees’ health and well-being.
People will continue to seek out financing, but banks will be less inclined to offer loans for things like payroll, and more eager to finance investments in robotics, AI and other technology-related ventures. New industries will be born and created, and we will see a massive acceleration of AI and automation across most industries.
Solomon Ali scales profitable companies across healthcare, technology and energy sectors through the acquisition of funding and management consulting. Ali and his team have successfully closed more than 140 mergers and acquisitions and arranged more than $250 million in structured investment capital. In addition, Ali is CEO of NDR Energy Group, one of the largest minority-owned energy companies in the United States. He is CEO of Revolutionary Concepts, which owns multiple technology patents, licensed by smart-home companies including Ring (owned by Amazon) and SkyBell. Ali is currently host of the podcast “MBA: Minority Business Access.” Recent guests have included Constant Contact co-founder Alec Stern, motivational speaker and New York Times bestselling author Les Brown, and Priceline co-founder Jeff Hoffman.
