COVID-19 Advice

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Practical Considerations Regarding COVID-19 and Your Company

The impact of COVID-19 on businesses remains uncertain, and relevant information continues to evolve daily.  Health, safety, legal and macroeconomic information is being provided to assist business owners and leaders to adapt to this changing and challenging environment.   While we can’t predict how this will play out, we would like to provide you with some practical advice to consider for your company.

1. Identify your key stakeholders and their needs from the company and the company’s needs from the stakeholders.

All companies have at least five major stakeholder groups.  The main stakeholders categories are;

    • Employees (including temporary workers)
    • Customers
    • Suppliers/Vendors
    • Capital Sources (Banks, Investors, and Owners)
    • Communities

Each stakeholder has different needs from the company, and understanding their needs from the company will help you make the best decisions.  For example, employees need such things as a safe working environment, regular paychecks, and clear communication so they can make informed decisions for themselves and their families.  Decisions made by the company in response to COVID-19 will affect various stakeholders differently, and the company should consider these differences and then proactively communicate with these stakeholder groups.

Alternatively, the company needs different things from each stakeholder or stakeholder group.  For example, the company needs suppliers to provide the right products, at the right time, in the right quantities, in the correct sequence, and at the agreed-upon price.  Understanding the company’s needs and clearly communicating them to stakeholders will be critical during this time.

Similarly, bankers and other capital providers need to understand what steps the company is taking to preserve cash flow and effectively manage risks.  Your company should take the time to prepare and prioritize a list of potential sources of cash and measures to preserve cash to assure liquidity (e.g., asset disposition, contract renegotiation, cost reduction, etc.) before action is needed and while stress is relatively manageable.  Then your company should share this information with capital providers (banks, investors, etc.) proactively.  This will give the capital providers confidence that management has plans to address foreseeable business issues reasonably.

Identifying your company’s key stakeholders, identifying the needs and reasonable expectations of those stakeholders, and identifying what the company needs from stakeholders is an essential first step.  This will allow you to consider how any decision or response to COVID-19 will impact stakeholders and what you may need from them.

2. Build a team to address COVID-19 impacts on the company and its stakeholders.

Each business should create a cross-functional team that is responsible for issues related to COVID-19 and its impact on the company and the company’s stakeholders.  Key leaders and departments should participate in this team or be represented on this team.  Human Resources, Operations, Supply Chain, Sales, Marketing, and Finance should be part of this team.

The team should meet to develop an initial plan for the business and a method for communicating this plan to stakeholders.  A primary point of contact for each stakeholder group should be assigned, as well as a backup.  The company should establish a rhythm of regular communication with stakeholders and a method of communicating (e.g., email, phone, etc.). 

The team should meet regularly to evaluate the changing situation and adjust the plan.  The team should also assess the effectiveness of communication methods and make adjustments as needed.

3. Establish effective communication with customers, suppliers, and vendors.

Effective two-way communication with your customers and your suppliers/vendors will be critical over the next several weeks. 

Changes in customer demand are likely, increasing for some and declining for others, depending on how COVID-19 impacts the market for your company’s products and services.  Additionally, some customers may try to stockpile inventory as a buffer for anticipated disruptions in their supply chain.  We strongly recommend that your company work proactively and closely with customers to understand customers’ actual demands and set clear expectations around your company’s capabilities to satisfy that demand.  Consider daily communication with key customers to understand changes in their business and communicating to them changes in your company.

Similarly, it is critical to work with your suppliers/vendors to minimize and mitigate disruptions to the supply chain.  Your company should identify critical components within the supply chain, as well as critical suppliers.  Your team should work with these suppliers to understand the steps they are taking to address COVID-19 disruptions and any impact their supply chain is experiencing or likely to encounter.   Contingency plans should be developed for each of these critical suppliers, including alternate sourcing, alternate components, in-sourcing, or re-prioritizing orders with suppliers.

4. Build and utilize a forecasting tool to improve daily decision making and effectively communicate with internal and external stakeholders.

We recommend all companies develop and implement a 13-week rolling cash flow forecasting model to accomplish three primary objectives:

    1. Predict cash flow and collateral, week over week, for the next 90 days.
    2. Allow for or improve decision making at the transaction level.
    3. Allow for or improve communication with key internal and external stakeholders.

A 13-week rolling cash flow forecast shows the details of anticipated cash receipts, cash disbursements, and changes in bank collateral through the forecast period.

Cash Receipts – your company should forecast when current accounts receivable (AR) will be received, and when future revenues will convert to cash receipts.  Other non-operating cash receipts (e.g., interest income, proceeds from the disposition of assets, etc.) should also be included in the forecast. 

Cash Disbursements – your company should forecast cash disbursements from current accounts payable (AP) and future planned expenses.  Other non-operating cash disbursements (e.g., debt service, un-funded capital expenditures, etc.) should also be included in the forecast.  Future projected disbursements can be derived from budgets and recent experience, but should also consider anticipated changes to your business as a result of COVID-19 (e.g., reducing production headcount or hours, renegotiating vendor terms, etc.). 

Bank Collateral – many companies have a line of credit with their bank, the borrowing on which is tied to a collateral-based formula, usually involving AR and inventory.  Any useful cash flow forecast must also show how changes in AR and inventory impact the bank’s collateral and, therefore, the line of credit.  The collateral component is often missed in 13-week rolling cash flow forecasting models and can lead to unanticipated liquidity challenges.

Cash On Hand – finally, cash on hand is calculated based on beginning balance, plus cash received, minus cash disbursed, and changes in the line of credit. 

Additionally, this is a beneficial tool to use when communicating with your stakeholders.  If a customer asks to revise payment terms, you can make the modifications in the forecast to determine the impact on your liquidity before agreeing to the change.  If you are asking the bank for some form of relief, you will be able to show them what you are basing your request on, which will give them confidence in management tools and decision making.

5. Collect relevant information from sources in your network.

The Federal, State, and Local Government responses to this crisis are rapidly evolving, and new executive orders or guidance appear daily.  The company’s management team should identify and then utilize sources within your network to collect relevant information on the COVID-19 crisis, potential impacts on the company, and ways to respond.  This could include government agencies, trade resources, customers, suppliers, banks, attorneys, CPA firms, insurance providers, and other professional service providers. 

For example, the President recently signed into law a temporary expansion to the existing Family Medical Leave Act (FMLA), expanded sick pay, and a payroll tax credit to offset the costs to employers. It will be vital for your company to work with your network of service providers, such as labor lawyers, to stay abreast of changes and the government’s response to make the best decisions for your company

Additionally, some companies may have business interruption insurance policies that would allow the company to claim lost revenue, fixed costs, or other operating expenses impacted by COVID-19 related slowdowns.  Talking early with your insurance provider will allow businesses to understand the resources available to them.

6. Communicate your plan to your stakeholders.

Once you have identified your stakeholders and their needs, built a team, collected all relevant information, worked with customers and suppliers, and built useful forecasts, it is time to communicate the plan to your stakeholders.  The company should have a primary point of contact for each stakeholder group.  For example, the CFO should be the primary point of contact for stakeholders like the bank, investors, and CPA firm.  The Sales Manager would likely be the primary contact for customers.  This point of contact would be responsible for gathering needed and relevant information, and communicating the company’s plan to stakeholders, and also responding to questions from stakeholders. 

The method of communication should be considered, as well.  Most companies will start with email as the primary form of communication.  With some critical stakeholders, such as key customers, key suppliers, the bank, etc. your company should reach out via phone to communicate the plan.  Given the current request for “social distancing,” in-person communication should be reduced or eliminated.

7. Repeat steps 3 – 6.

Once the plan is in place and communicated, your company should be continually repeating steps 3 – 6.  Continue to collect information.  Regularly check in with your customers and suppliers. Frequently update your forecasts.  The situation is evolving, and your plan should evolve, as well.  Changes to the plan should be communicated to stakeholders as appropriate to minimize any surprises and disruption.

It is crucial to start this process as soon as possible.  While you will not be able to predict precisely how the COVID-19 virus crisis will play out, having a framework to make timely and effective decisions during the crisis will be vital for your business to navigate this challenging time successfully.

How can DWH help?

If you would like assistance with developing and implementing your company’s response to COVID-19, please feel to reach out to DWH.  DWH has extensive experience supporting companies through difficult times.  Additionally, DWH has proprietary cash flow and forecasting tools that can be quickly implemented in companies in a variety of industries.  We also offer interim management support, such as CEO, COO, CFO, and Controller, for companies that have had workforce disruption due to illness.  DWH has the experience, tools, and staff to support your business remotely during this period.

The Importance of Strong Due Diligence in Tribal Acquisitions

As more Tribal Nations use Economic Development Corporations (“EDC’s”) to take on larger and more sophisticated investments, it is necessary to develop an equally sophisticated due diligence process.  This process must go beyond simply investigating the transaction and expand to seek a thorough understanding of the operations and infrastructure of the Company as well as the impact of any transition with ownership and/or leadership.

A company’s value is based on its ability to sustain and improve cash flows while managing business risks.  Ownership and leadership transitions create risk to the company and its cash flow.  Crafting a due diligence process that helps the Tribe understand the factors in the business that impact cash flow, stability and growth opportunities (and how a transaction would affect these) will help protect the Tribe and increase the likelihood of a successful acquisition.

Why is due diligence so important?

Due diligence is a process for doing a thorough investigation to better understand the investment and identify potential risks and opportunities while validating that the purchase price will allow the new entity to meet the required returns.  For the most part, due diligence seeks to accomplish three things:

1. Validate

First and foremost, due diligence is there to verify that the information provided by the seller is truthful and correct.  This includes the financial statements (or any adjustments thereto), contracts, legal documents, operations of the company, or the legal standing of the company.  This part of the due diligence process verifies the basis for the purchase price.

2. Understand Risks

Second, due diligence should be used to understand, assess and qualify the risks associated with the investment opportunity.  Some examples of potential risks to examine are:

  • Will an ownership change have an impact on the ability of the company to perform as it has in the past?
  • Who are the key personnel who understand and can manage the operations on a day to day basis?
  • What is the risk of losing key staff with a change in ownership?
  • Does the remaining management and/or ownership share the EDC’s vision for the company moving forward?
  • How vital is the company to its customer base?  How strong is the supply base?
  • What will be the capitalization requirements for the company at closing and into the foreseeable future?

3. Prepare for Transition

Third, due diligence helps develop a plan for the transition, or post-merger integration, of the company into the Tribal EDC’s portfolio.  Some key things to consider include:

  • Is it possible to mitigate or eliminate any of the risks identified during due diligence with the transaction closing and transition?
  • What legal jurisdiction and UCC code will the new entity operate in?
  • What are the tax implications of these decisions?
  • How will key strategic decisions be made for the new entity once they are under the management of the EDC’s holding company?
  • What changes will need to be made to the new entity’s operating agreement, HR policies and financial systems in order to keep it in compliance with the EDC’s requirements?  This is especially important for Federal 8(a) contracting companies.

The importance of a strategic plan:

While the steps mentioned above are extremely important, they become nearly meaningless if the EDC does not have a thorough strategic plan to guide the acquisition process.  A strategic plan provides direction and structure to the complicated task of performing due diligence by:

  • Outlining the investment criteria (i.e. – controlling interest requirements, industry or sectors to be sought out or avoided, minimum expected  returns, etc).
  • Alignment of key stakeholders and set the expectations of any investment (does the due diligence show that the projected future performance meets the expectations set by the strategic plan?).
  • Define the priorities of the due diligence investigation (emphasis on financial, operational, leadership, future opportunities, historical results, etc).
  • Define how due diligence will be coordinated and who is involved in the approval process.

Any investment, especially a direct investment in an operating company, is an exciting but complicated process.  Due diligence is a key factor to provide an investment the best chance of succeeding and providing positive returns.  Having a strong due diligence process, transition plan, strategic plan and qualified advisors in place before an acquisition will help ensure an EDC obtains all necessary information to make a well-informed decision.