In an August 3, 2020, letter to Congress, 100 top CEO’s, including the CEO’s at Microsoft, Google, Facebook, Starbucks, Merck, Salesforce, Mastercard and Walmart, put their names to a letter, and their reputations on the line, predicting “catastrophic” small business failure before years end if Congress does not act. “From retailers and restaurants to consulting firms and manufacturers, small business owners are facing a future of potential financial ruin that will make the nation’s current economic downturn last year’s longer than it must.” They went on to say, “To survive until a vaccine is widely available, millions of small businesses will require longer – term support from the federal government.” Their plea for action could not be more urgent noting that every day without a plan makes recovery more difficult and that without action, permanent closures will lead to a domino effect of lost jobs, products, and services by Labor Day which “could be catastrophic.”
These are people who would know. Starbucks knows how many cappuccinos they sold between 11 and 12 PM on August 1, 2013. And every hour, and every minute, before and after. These CEO’s see something in the trends. Things they don’t like. CEOs of major corporations don’t use the word “catastrophic”, lightly. Even less likely in a letter that they sign and make available to the news media and the public.
Their solutions, however, focus on the income side. The government giving money to small business to hobble along. That’s a short-term fix. Purchasing patterns have changed. Probably for decades to come. People will stay home more. They will save more. Last year’s steady customer may not purchase goods and services the same way next month or next year. In fact you can count on the idea that they probably won’t.
The goal is not to just “keep your head above water.” The goal is to thrive. If income is down 40%, that is still 60% of last year’s income. And so long as expenses are reduced, a company can be profitable. And the lifestyle that is the byproduct of a successful business can be preserved– whatever the economic market is. If last year total business receipts were $500,000 and expenses were $350,000, the owner’s income was $150,000. If income receipts go down to $400,000, same level profitability can still be maintained by decreasing expenses to $250,000.
Achieving this was next to impossible prior to the Small Business Reorganization Act. Before, only through a regular Chapter 11 could this type of debt reduction be possible. But the rules of Chapter 11 made it very difficult. In a regular Chapter 11, numerous hurdles are put in place to protect creditors such that only if prior ownership was willing to walk away from all equity ownership was it even possible to reduce debt. Arcane rules about each class of impaired creditors having to approve added to the difficulty. Trustee fees. Attorney fees. Little or no guarantees. All these things, mixed together, made small business reorganization not much more than a theoretical possibility.
That has now changed. Under the SBRA rules, current ownership can maintain ownership and still, as we say in the business, “cramdown” a plan of reorganization that eliminates unsecured debt, extends purchase agreements, reduces interest rates and rewrites amount owed to the liquidation value of the collateral– whether the creditor likes it or not. And almost all the other “prohibitive” rules have been relaxed, as well.
Sure, government cash infusions to cover expenses will help – in the short-term. Much like pumping blood into a person with a severed artery. Good for a while. But the end result is only delayed if the “expense” side of things is not dealt with and dealt with quickly.
The best answer to long-term survivability in this “new normal” is to reduce expenses. That is exactly where the SBRA comes in. A company’s ownership and management’s use of the tools available under the SBRA will mean the difference between the survival of the company and the lifestyle that that company provides to its owners, or not.
In short, you don’t have to be one of the victims those top CEOs are predicting will soon start piling up.
The choice is yours. UPDATE: What these CEO’s said would happen, is already happening. Google “restaurant closures” for the current statistics.