With almost 700,000 employees having lost their jobs since March and the economy having shrunk more than 20% in the last quarter, COVID -19 has made an indelible impact on the country’s current and future business landscape. For small- and medium-sized enterprises (SME), this effect is even more significant because they do not have the resources at their disposal as do bigger firms. This means they not only have to work harder but also think smarter than their larger peers.
The Chancellor recently announced that he is looking at ‘creative’ ways to support the economy and that should of course be applauded. However, SMEs must be aware that each new Government programme (or extension of old programmes) is akin to a subsidy. To consider these subsidies as the new normal is dangerous because, eventually, the Government’s finite resources will dry up or will have to be replenished in other ways (such as an increased corporate tax). SMEs need to start considering what life will look like when the ‘subsidised bubble’ pops and begin preparing accordingly.
I cannot stress enough that preparation is key because the fallout will be tremendous. I do not expect it to be a domino effect but something more akin to a rather large stone thrown into a pond. For each business that goes bust landlords, creditors, suppliers (and the HMRC) are impacted. This then affects their own landlords, creditors, suppliers (and, again, the HMRC). It goes without saying employees and contractors will bear the brunt as they find themselves out of a job.
The first consideration to mull over is whether your business model is viable in a post-COVID world. Consumer patterns have changed since March, with different tastes and habits emerging. All businesses must adapt to the new normal. Moreover, SMEs, even if their business model was sound, must also look at ways to become more efficient and profitable. Gone are the days of zombie companies lumbering along, dependent on low interest rates to stay afloat.
In tandem, business owners must take a cold hard look at their numbers. Whilst this is a given at all times, regardless of whether there is a pandemic or not, companies need to make sure they are taking care of their short- and long-term commitments. One thing that is worth mentioning is that while it is commendable that the Government suspended the wrongful trading liability to “remove the pressure on directors to close otherwise viable businesses to avoid potential liability” the provision of billions in financial relief would have been safer if there had been a clause instructing businesses to not spend everything and ensure they have enough cash on hand to pay their taxes come May 2021. For the businesses that have taken a loan from the Government or have applied for a VAT payment deferral, they still must accept that they will eventually have to pay back the loan and/or taxes. Under no circumstances should a company go beyond its means, even if the owners think they will turn a corner soon. Entrepreneurs are an optimistic and confident bunch but it’s at times like these when an austere and calculated attitude is required.
Lastly, companies must think about M&A. Understandably, M&A activity collapsed with the onset of COVID-19 but it is now picking up and we expect three sets of peaks – once the eviction ban is lifted, then again in May when it’s time for HRMC deferrals, and this time next year when the Coronavirus Business Interruption Loan Scheme (CBILS) grants are due. While a company selling all or part of itself is a normal occurrence in its lifecycle, it is best done when it is on good financial footing. To have to sell from a place of desperation will not bode well for its brand nor price tag. If you think M&A is a potential option at some point within the next six months, start preparing now. Consider what is best kept under current management and what should be spun out as well as what can be sold to raise strategic capital to finance the parts of the business you keep.
Keeping these three points in mind at all times will help any SME navigate the uncertainty that the next 12-18 months will bring. The UK Government has shown excellent leadership with the work it has done supporting businesses; however we cannot expect this help to last forever. Eventually, the subsidies will die off and only those businesses that prepared for life post-COVID will survive.
Cameron Gunn, senior partner at ReSolve, heads up the advisory and investment teams. He is a Chartered Accountant and licensed UK Insolvency Practitioner.