Given the uncertain times, the NY Tech Alliance, The CEO’s Right Hand, and EisnerAmper hosted a webinar for business owners on Thursday, April 16 to discuss company financials and what you should be doing to weather the storm. We provided vital information, tips, and tools and addressed questions like:
- What steps should you put in place to weather a financial downturn?
- Where should you make investments in the business now?
- How should you forecast sales/revenues in times of uncertainty?
- What information should you request from your finance team?
- Can you raise capital now?
- Does it make sense to explore debt or equity fundraising?
In case you missed it, here is a replay of the event followed by the video transcription:
Andy Saldana: All righty. Everybody, welcome to the New York Tech Alliance virtual session today titled, Your Company Financials – What the
Hell Do You Do Now? [laughs] We’re joined with The CEO’s Right Hand as a partner in this program talking about your company’s financials during this time, reassessing your assets, how to extend your cash flow, access to capital, things of that nature, to help small businesses and entrepreneurs figure out their financials during this time.
Before we get started, just a few quick welcome announcements. My name is Andy Saldana. I’m the executive director of New York Tech Alliance. We’re a nonprofit organization that works to create an equitable and accessible tech community here in New York city. We’re most known for our flagship event, the New York Tech Meetup, where we showcase amazing technologies to a room full of fantastic technologists.
A quick thank you to all of our annual partners who help our programming and help the organization provide the programming that we provide year-round. You can see some of our favorites, and we have some wonderful panel participants from Eisner today. And if you’re interested in becoming a sponsor, please reach out to me after this event.
There are three ways that we’re asking that you can support New York Tech Alliance during this time so that we can continue providing virtual programming to you and to the community at large. One, is make a small donation when you RSVP for any of our events. Two, is to become an individual or corporate member of New York Tech Alliance. Or three is just, again, to make a small donation on our website. You can find all of that information at nytech.org.
We have a nice agenda of virtual events coming up. Next up, we are doing our virtual networking lounge, which will happen every Tuesday from 6:00 to 8:00 p.m. on the Hio app. You can find information about that on our website. Next Thursday, April 23rd at noon, we run a series with Grasshopper Bank called Don’t Panic, Let’s Talk, very similar to this type of event where we bring founders together to talk about the issues that are concerning them during this time.
That session is not recorded. It’s, again, very Open Dialogue with your specific issues, and a moderator to help walk you through that. And then Tuesday, May 5th, is our next New York Tech Meetup. It will be our May 5th meetup. It’ll be the second virtual event that we’re doing for a New York Tech Meetup, and the platform is fantastic. The networking is actually really phenomenal for that event. To check out those and all of our other events, please check out our website at nytech.org.
And then, today, we have an amazing panel assembled for you that I’m going to be turning it over to in just one moment. Before we get started, Doug, can I get you to ask the first polling question? We’re going to be asking the audience to participate in a quick polling question. So, Doug, can you ask what that question is?
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Doug Binette: Sure thing. So, we’re just trying to get a sense of who’s here and what the size of your company is. You’ll have 30 seconds to answer, and I’m going to open that up right now.
Andy Saldana: Fantastic. And while they look at that poll, I’m going to turn it over to Eric Meisner from The CEO’s Right Hand. Go ahead, Eric.
Eric Meisner: Great. Thanks, to Andy and Doug. Good afternoon, everyone. I hope everyone listening is safe and healthy, and in good spirits, with everything going on during this pandemic. I’ll give a quick elevator speech. I was a big company guy early in my career. I worked at Deloitte, Viacom, and AT&T. Then, some AT&T executives were recruited to an internet startup during the dot-com boom of the late ‘90s, and they dragged me along for the ride.
We were part of the biggest crash of 1999. And, of course, my friends and family all begged me to go back to the big company life. But it was too late. I was hooked on startups. And I’ve been helping startup companies grow, first as a controller, and then for the last 10 years as a CFO. For the past 20 years, I’ve been helping these small companies. And I enjoy it so much, in 2016, I turned to the fractional world so I could help multiple startup companies at the same time. For the past two years, I’ve been a partner at The CEO’s Right Hand with our first panelist and my partner in crime, William Lieberman.
William Lieberman: Yup, I’m here. Thank you, and welcome, everyone. My quick, quick background, I spent a few years in investment banking here in New York, and then went to California, started an investment management consulting practice, within which there was a technology business unit. And then I spun that out into a separate company, a fintech company, that I built and ran for many years, and sold enterprise solutions to financial services firms across the United States. And then I saw my interest in that business about five years ago and formed The CEO’s Right Hand to help companies grow and scale using a financial lens, if you will. So, acting as financial business partners is what we do.
Eric Meisner: Thanks, William. Our second panelist is Eric Menke, founder and managing partner at Growth Capital, a boutique private equity firm.
Eric Menke: Thank you, Eric. I’ve spent my career building, growing, and exiting companies of various sizes, from startups to $100 million-dollar businesses. Throughout my career, my experiences really run the gamut from manufacturing and distribution companies to technology businesses. I’ve been through a lot of the busts and come out the other side. Got some stories to share, and a lot of scars for it, but certainly can hopefully share some insights, at least from my experience today, and what some of the participants here might be able to do to make it through to the other side here.
Eric Meisner: Great. Thank you, Eric. Our third panelist is the partner in charge of technology and life science at EisnerAmper here in the New York tri-state area. Please meet John Pennett.
John Pennett: Thanks very much. I hope everyone is operating safely as well. So, at EisnerAmper, we’re a full-service accounting and consulting firm. I head up our tech and life sciences practice. We’re working with entrepreneurs, helping them with outsourced bookkeeping, tax work, and then financial statements. Obviously, a lot of our time these days is really spent with liquidity and helping entrepreneurs grow their business. And we do a lot of work to help support entrepreneurship really throughout the country by supporting a lot of entrepreneurial programs, accelerators, incubators, etc. That’s actually kind of the fun part of the job, as opposed to putting numbers in boxes on tax returns and things like that. So, pleased to be here.
Eric Meisner: Great. Thanks, John. Before we get started, a few logistics about our call. The total length will be about an hour. All the listeners are on mute, so if you have any questions, they should be asked in the chat window. And again, if you want to contact any of our panelists or get a recording of this link, both will be sent out later this week.
Our first set of questions relates to the pandemic. So, we’re going to take a quick poll. And our poll question number two is, how worried are you about the financial stability of your company? If you want to bring those up, I’ll quickly read the choices. A) Great. I got this. B) Good. We’ll be fine, with some bumps along the road. C) Okay. We’ll come out on the other side, maybe a little bruised. D) I need help quick. And [laughs] e) Oh, shit. So, we’ll let everyone answer the poll real quick and see where we end up.
Okay, great. So, here are the first set of questions. And again, these are related to today’s times during the pandemic. So, in light of the pandemic, how do you evaluate if your business model is still sound? Meaning, given the tremendous shock that has happened to virtually all industries, how should a business owner reassess their service or product offering?
William Lieberman: I’ll take a stab at this one and see what John and Eric think. In my experience, especially going through the dot-bomb back in the day, and 9/11, and 2008, especially being in fintech, we had to really evaluate who are we selling to, and is the nature of our customer base and our target market being significantly impacted for the long haul, or was it just a matter of riding out . . .
And then in 2008, it was a year-and-a-half, two years for us in the fintech space to ride it out by the time that customers were buying again in significant amounts. So, for us, it was, what is the underlying industry that we’re selling to. I would assume a lot of people in this call are in the tech space. But are you selling to real estate? Are you selling to hospitality? Or are you in the cyber space? So, all these have very different ways of measuring the underlying fundamentals to those industries.
One way to think about it is to look at your customers, talk to your customers. What are they feeling from their customers in turn? So, reach out to them and get some information from them, in addition to talking to your strategic advisors, of course, and seeing what input they can provide as to what’s fundamentally changed or not, and is it going to be over the long haul or not. And then, other than that, looking at cost structure is important, what types of people are you going to need differently, if any, and what are the government or regulatory changes that are going to come out the other side from this event that we’re all experiencing, is my quick and dirty.
Eric Menke: I would just add one thing to what William just said, really to put a fine point on it. Coming out of this, it’s clear that customers of all shapes, sizes, and ilk are going to have changed behaviors. And it is going to be difficult in this moment to figure out exactly how the customer behavior is going to change. Because coming out of this, the world is going to be different in many respects.
As we’ll talk about, I think, a little later on about forecasting and sensitivity analysis, I think it’s really incumbent on the companies that are listening today to really think outside the box, that truly, the world may be materially different, and they’re going to have to think long and hard about some central tenets of their business, of what they think will actually endure and what won’t.
John Pennett: It’s interesting, one of the most popular people at EisnerAmper right now is actually an industry psychologist who’s been spending a lot of time with our clients and really helping to guide them through that process of, what will your customer look like? How will you deliver your products, your services in the future, and what does that mean to your workforce, how you deliver it, where you deliver it? So, really allowing people to fundamentally address those changes is a big, big challenge.
Eric Meisner: Great. Thanks, guys. Question two. We’ve lived through several different major economic downturns: the dot-bomb, 9/11, The Great Recession. And now, we’re in the pandemic. You’re experienced in dealing with these types of situations. How have companies been able to survive, and then, hopefully, thrive coming out the other side?
Eric Menke: Maybe I’ll speak up on this one. Having managed a whole array of different types of businesses over my career through all the various booms and busts we’ve had, I’ve learned one central maxim that really applies. Which is, in the boom times, it’s really never as good as you think it is. But equally, in the bad times, it’s never quite as bad. Things may shape differently coming out of a bust cycle, but it’s never often as bad as it looks in the darkest hour. So, I hope everyone will keep those things in mind as they’re staring at potentially having no revenues for the month of April, or looking out into May and wondering how they’re going to keep the doors open.
I do want to encourage all of you to think about how you will come out of this. And let me talk about the number one thing I learned in how to survive this. And that is, communication. And it requires open, honest, and forthright communications with your key constituent groups starting, number one, with your employees. You’ve got to keep them in the loop. You’ve got to help them understand that you’re going to survive, that you’re going to thrive, that the business may change, but you’ll make it through the other side. As I said, it’s never as bad as it looks right now.
Equally, beyond just communication, not just beyond surviving, but to thrive, this is a prime opportunity for companies to think about how they may be able to take advantage of their competitors falling by the wayside. There’s going to be huge opportunities coming out of this to take market share. A lot of competitors will be stunned, will come out of this flatfooted, will be too preoccupied dealing with lenders over leverage with their suppliers.
This is a prime opportunity, to the extent possible, to think about how you would be able to differentiate, how you’ll be able to capture market share, how you’ll be able to re-message and change the positioning of your product or service in a way that better suits the customer coming out of this. And again, I think we’ll talk a little bit later about where the panel thinks the customer mindsets may be coming out of this. But truly, to survive, communication. To thrive, I think truly, think about how to differentiate and how to take advantage of market share opportunities as competitors are going to fall by the wayside.
John Pennett: I think just good engagement with your customers, engagement with your vendors, and probably most importantly, engagement with your employees. They’re on the front line. They’re dealing with your customers and vendors. They’re hearing what’s going on and what new things need to be adopted to be responsive to the market. It’s hard to engage your workforce in this environment. We’re doing virtual happy hours, and check-ins, and all kinds of things to be as engaging as possible. It’s still really hard to do. But they’re on the front lines, so you’ve got to get their input.
Eric Menke: Yeah. And I just want to add one more point around communication. Most of these businesses have different and equally important constituencies. So, there are customers, of course. There are employees, there are lenders, and there are investors. And with each one of these constituent groups, it is really critical to have your messaging down.
The biggest mistake I see with small and medium-sized businesses in crisis environments is they go silent because they can’t figure out what to say. They stop talking to their lender. They don’t answer the calls [laughs] from their investors, and they pretend nothing is wrong with their customers. Well, all three of those approaches are poor tactics. As I said at the outset, forthright communication, knowing what you’re going to say, being clear on your message and to each one of those constituent groups is really critical to make sure you come out of this.
Eric Meisner: Great. Thanks, guys. I’ll just reinforce Eric’s note about staying positive, both at work and at home. Times are trying right now, but everyone do your best to stay positive.
Okay. The next question. We’ve often heard that before you figure out where you are headed, you have to take stock of where you are. What are the key financial components that need to be evaluated when determining the current state of the union for a small company?
John Pennett: Sure. This is John. I’ll grab that one there. It sounds like an accounting type of question, so, thank you. I think the first thing is, obviously, you want to have clear visibility as to the critical items on your balance sheet, so your cash balances, your payables, your receivables.
We kind of think in terms of, gone are the days where 15 days after month end, you’re getting your report of your balance sheet and your results of your operations, and you can take a look at it and make your analysis and decisions. You need that information today. You need it every day. So, you need to have some sort of a dashboard where you have really clear visibility on that and look forward. People talk about the 13-week cash flow forecast and things like that. But certainly, in this environment, clear visibility on those payables, receivables, and cash is first and foremost.
The second thing I would say is a true and realistic backlog. We see a lot of backlog reports which are often more hope than reality. So, backlog, you need to be fair and honest with yourself, including really thinking about when that cash is going to come in. And the final thing, which is also important as you think forward is, what are commitments that you’ve made, whether they be to vendors, lenders, landlords, etc., and having good visibility as to what those are, as you can kind of adjust your thoughts going forward.
William Lieberman: Yeah. And if you look at your burn rate too, right? That affects what’s on your balance sheet going forward, and what can we do to adjust that burn rate to give us more runway is critical. So, how many months of runway do we have, is another metric. I don’t know if that sort of feeds into that, John. But —
John Pennett: Yeah, absolutely.
William Lieberman: — that’s important too, and the makeup of your revenues. If 90% of your revenues are recurring because that’s the type of subscription model that you’re selling, that’s obviously way more helpful than 90% nonrecurring. So, that’s important too. To the extent that you can adjust along the way, it would be great.
John Pennett: Yup. It all builds into your forecasting, right?
William Lieberman: Exactly.
Eric Meisner: Great, great. All right. Thanks, guys. The next set of questions are related to forecasting. So, we’re going to ask our third poll question now. Audience, do you have a formal budgeting or forecasting process in place? And your four choices are, a) What’s a forecast? B) Sort of. We meet for beers quarterly and decide what we should do differently. C) Pretty good. We have a process. We have a system in place, but it could improve. And d) Yes. We have this down to a science. So, we’ll give everyone 30 seconds to complete the next poll.
Great. While you complete the poll, I’ll ask the next question. Again, the next couple of questions are related to budget and forecasting. What should business owners do differently in terms of forecasting revenues and expenses in times like these? The ground is shifting under your feet. What do you do?
William Lieberman: So, in my experience, the important things are to reassess the key assumptions that you have, especially on your revenue side. Your revenues are going to be one of the key drivers here, so what are the key assumptions that you have for your revenue model? So, what is the pricing, and has that changed? What is addressable market? Has that changed? The rate of adoption, how quickly are you going to be able to close new business? Is that going to stretch out or not? So, going back and reevaluating, reassessing the key assumptions of your revenue models is number one.
Number two, reforecast more frequently than you would otherwise. Some people do forecasts monthly. Some people don’t do them at all. But let’s say if you did them quarterly, maybe you should do monthly. If you do monthly and you’re in a really rapidly changing business, or the markets are really shifting very quickly, we’ve even seen people do weekly, especially if you’re looking at cash forecasting. Reforecast more frequently than you would do otherwise. Create different scenarios, so the best-case, worst-case, and base case kind of situations. You want to figure out what those scenarios look like and create new ones, again, based upon what you’re seeing in the marketplace today.
And lastly, make sure that you have the right key performance indicators, what we call the knobs and dials of your business. Make sure that you have those types of metrics and ways of measuring how well you’re doing in that model so that you can play with those and get some sensitivity analysis against what’s happening. So, really, the trick is to make sure that you spend a little bit more time on understanding the impact from your business to your financials.
Eric Meisner: That’s a great segue to our next question, William. How do you go about monitoring the business? What metrics or KPIs, key performance indicators, do you recommend companies should be looking at?
Eric Menke: I’ll speak to this. But I actually want to first add something to what William was saying. Coming out of this crisis, as I said earlier, I think customer behavior is going to change. And we don’t know exactly how yet by industry, by business, and we don’t know what truly will shape demand going forward in various sectors of our economy. So, it does become hard to think about forecasting. It becomes difficult, truly in a vacuum, to figure out exactly how one should look at the business when it comes to the future and forecast an analysis. There are KPIs and things we need to look about today as the businesses during this crisis, and then there’s, how are we going to forecast as a business a year from now.
I think that the most important thing that the listeners here, the participants in this presentation can take away, with respect at least to forecasting, is that you’ve got to be prepared to think in an unorthodox manner and to respond accordingly. Example. Coming out of this, it might be necessary that you might have to give away some of your product. It might be necessary that you may have to unbundle some of your product. It might be necessary to have to bundle some product and services coming out of this. And so, your business model might radically change.
And so, when it comes to forecasting, and when it comes to sensitivity analysis, and when it comes to, ultimately, KPIs, it really behooves you to think radically, in the sense that a lot of the ways in which you sell your products or services, a lot of the ways in which your customers buy the products and services, and what they buy, and how they’re going to pay, probably going to change.
So, from a forecasting standpoint, I would really take the exercise of throwing things against the wall and looking at, I would call, a bit of a radical approach. What if we had to give away a third of our product? What if we had to go to a subscription model? What would that mean? How would we have to reforecast? What would that mean for cash flows? What would that mean for expenses and cost structure? This is truly unlike any other downturn that we’ve seen. And I think it really requires companies to think radically about how they might come out of this in terms of the way they forecast and do sensitivities.
Now, just specifically about key performance indicators in the near-term, I think William hit on it, which is, first and foremost, you’ve got to look at your cash. You’ve got to do a 13-week cash flow model to make sure that you’ve got at least the staying power to make it through this. You’ve got to look at, from a sensitivity standpoint, how you want to prioritize costs and prioritize things that keep your business alive, and things you may have to shelve, be it R&D, be it new hires, be it marketing.
So, by industry, KPIs in this particular environment are very difficult. That’s why I want to speak more about how you’re going to look forward. Because for many businesses, revenue has stopped. So, key performance indicator in this environment, for many businesses is, there’s zero revenue. So, where do you go? What do you start looking at? And that’s where I’m saying more approach to thinking about how you’ll shape this business going forward, and forecasting, doing some real out-of-the-box sensitivity analysis is, I think, where a lot of these businesses ought to be spending their time.
John Pennett: We’ve seen a couple of our clients who have a subscription model actually doing a little bit of services work to help their clients think through some issues and things like that, so it’s perhaps a small revenue stream, keeps some people busy, etc. So, I think that’s kind of interesting. You have to reinvent yourself all the time and help your customers reinvent themselves also.
Eric Menke: Yeah. This is time for out-of-the-box thinking when it comes to looking at the business model, looking at key performance indicators, and sensitivity analysis. Just going to keep going back to that. Do not assume we will go back to business as usual coming out of this. I think that’s important.
Eric Meisner: Great. Thanks, guys. Next question. Do you use a top-down or bottoms-up approach when creating a forecast? And to be clear, can you explain the difference between the two approaches?
John Pennett: I’ll take a stab at this one here. I think one of the things that you would traditionally see for a technology company, especially if there’s an M&A transaction going on, or a significant investment coming in, and someone really trying to do good quality earnings analysis, one of the questions, I think, that’s been traditionally most challenging for companies, especially younger companies is, what is the fully burdened cost to deliver their services? So, what does it really take to deliver whatever it is that you’re delivering to the customer all in? So, allocations of payroll, your AWS costs, etc., etc.
Many younger companies don’t have the ability to do that. And what these larger organizations are looking at is, “If I can push my scale and drive growth in the business, I can do that through my connections.” But what does it really cost to deliver? So, I think I always think of that as something that you really need to understand. And to do that, you really need to start at the bottoms up, right? So, you’ve got to go through all elements of the business, really drill down into what is it really to put all those pieces together.
In this environment, I also like the perspective of the bottoms up forecast from the perspective, you can really try to isolate the costs for your initiatives that you’re doing, whether they be R&D and product development initiatives, sales and marketing, things like that. So, you can kind of isolate those things and prioritize based upon cash flow and cash flow availability, what you might want to do.
And I know a controversial topic is, and is something to think about, some companies try to get to client level profitability, which includes all of the costs of your customer acquisition costs, the cost to deliver, your commissions, all of those different elements to truly come down to, is this a profitable client? Is this a profitable business? Is this a relationship that’s worthwhile? That takes a lot of data, and a lot of analysis, and a lot of creation upfront. So, that’s something I think that is ultimately useful, but maybe not useful for some companies, especially in this particular environment.
The top-down approach, I think, is really important to keep an eye on the bigger picture. And as Eric was mentioning earlier on, as you come out of this environment, this downturn, what are things potentially going to look like? You may not be able to really do a bottoms-up forecast at this point in time, so you may have to look at this in this new environment from a top-down perspective to say, “What might this look like in the future? Is this business sustainable?” etc.
Eric Meisner: Great. And I’ll just add, before we go to the next question, if we’re confusing you [laughs] with all these ideas, and you’re not sure how to prepare some of these, and your investors are hounding you, at a minimum, know your cash burn. You want to be able to say to your investors, and I just did this for one of our clients, “Hey, the revenues are on hold. We don’t know when they’re coming back. We don’t know how long this virus is going to take.” But in this coronavirus vacuum we’re in, we knew their cash burn was $40,000 a month. So, at least now the investors know, until further notice, what the burn is until we’re out of this. So, something to think about. At a minimum, always know your cash burn.
Okay. The next question, it’s still in the forecasting world, if someone could talk about sensitivity analysis, how does that work in creating various forecasts?
Eric Menke: I can speak to this, just basically reiterating what I had said a little bit earlier, but more exclamation points on it. This downturn is unlike any other that we’ve seen. And coming out of this, it’s going to shape behaviors in ways that we can’t anticipate on a global basis. Never before had we had a situation that has affected economies of the entire world at the same time. And that means when it comes to sensitivity analysis, you’re really going to have to think out of the box.
And that means you’re going to have to look at extreme sensitivities, which are things like, it may be coming out of this, nobody buys your product anymore. Nobody subscribes to your service for six months. It may be coming out of this that, and we’ll talk more about vendors and suppliers later, but it might be that many of your vendors or your suppliers disappear coming out of this. So, sensitivity analysis is going to have to have a very large standard of deviation when you start to work on what the scenarios are. You’ve got to think about these things right now, because you’re going to have to plan. This is not a, “Oh, we’ve just had a five or 10% downturn or recession. It’ll last for 12 months.” Radical change is coming. Radical change is coming globally. I can say that with a great deal of emphasis.
And as a result, when it comes to sensitivity analysis, you’ve got to really stretch the thinking and plan accordingly. What does your business look like if your three top vendors disappear? What does your business look like if your two top service lines, nobody wants anymore, or views it as a nice-to-have and not a need-to-have? And so, when you do the sensitivity analysis, unlike doing a sensitivity analysis in a sort of bread and butter recession, in this scenario, it’s really key to stretch the limits here in this particular environment when looking at extremes. And I think you need to think about extremes. I think that’s really critical.
Eric Meisner: Great. Thanks. John or William, anything to add there?
William Lieberman: No, that was good. I agree.
John Pennett: Thanks, Eric.
Eric Meisner: Okay, great. So, that wraps up our forecasting session. Our next set of questions relates to things you can do right now. So, we’re going to ask our fourth poll question. Have you successfully renegotiated terms with any of your vendors, suppliers, your landlord, or any of your investors? So, Doug can pop up the poll. Choice a) No. It doesn’t make sense for us. B) Not yet, but we should research, for sure. C) Yes. Way ahead of you.
Okay, great. So, let’s go to our questions about what you can do right now. The first one, one of the ways companies can cope with the downturn is to renegotiate their existing contractors. What strategies have you found that work in negotiating new terms with existing lenders? What terms are most important to consider changing, and how do you create a win-win situation?
Eric Menke: I can take a stab at this one as well. I’m going to start with lenders. The old adage, right? Lenders are interested in the return of their principle, not a return on their principle. And in this environment, I think that particularly holds true. Lenders are going to have a lot of issues with a lot of companies. The irony is, the worst time to do poorly and get in trouble with your lender is in good times, because they are not having to deal with an entire loan portfolio that’s in trouble.
The best time for you as a company to have trouble with a lender is actually in a difficult environment, because your lender is up to their eyeballs in alligators. And the last thing that a lender wants to do is take over your business. They want you to just get through this thing, and they’re interested in making sure that you do, because they’re not interested in putting you into workout. So, the very first thing I want to say, to the extent that any companies here are having or will have, likely, issues with their lenders is, relax.
Now, lenders are going to, by procedure, rattle their saber. They’re going to send you default notices. They’re going to talk to you about all the violations of covenants that you may have triggered. But that’s all formality and the legal process. In actuality, the lender just wants a return [laughs] of their principle, not on their principle. And they want you to be the one to do the work, not them. When it comes to negotiating with lenders, and again, we’ll talk about vendors and suppliers, but for lenders, it’s all about forbearance. If you need time, that’s what you need to be able to express to them, that, “We can get you repaid.” It’s about extending maturities.
Now, yes, might you have to pay our higher interest rate? Of course. But does the lender truly want you to get through this, and are they likely willing to negotiate with you, with respect to forbearance, i.e., not paying principle interest for some three, six, 12-month period? Absolutely. And not withstanding whatever they say, and whatever threatening letters or memos you may get, you will not have any issue negotiating with them when it comes to the prospect of, “I just need some time, and I will get you repaid.”
If your business is not going to be around coming out of this, that is a different matter altogether. If your revenues have gone to zero, for instance, if you are a restaurant and it is likely, coming out of this, that your cost structure and your product offering is just not going to be survivable, that’s a different matter. But I think for the companies on this presentation, most of you have great prospects coming out of this, especially in technology.
So, there is a light at the end of the tunnel. And I want everyone listening today to know that as it relates to lenders, believe me, you will have their ear, and you will more than likely have more opportunity and more leverage than you think to negotiate with them. Venders and suppliers — go ahead.
John Pennett: I was going to say, doesn’t that also put a lot of emphasis on what your forecast is going to look like as well? So, when you’re having those conversations, like having a realistic forecast, and maybe a base case and a best-case and a worst-case of it, you’re having a truthful conversation.
Eric Menke: Absolutely. As I said earlier, candid, candid, candid communication and open communication with them, and often and frequent communication with them, is key. And forecasts, of course, are going to be a really important part of it. And I think giving the lender some view that you’ve thought about all the different permutations coming out of this, and ways in which your business will survive and thrive, is really important.
William Lieberman: But are they going to, if you say, “I need a few months of abatement to my principle and interest payments,” or maybe even just interest, but principle interest payments, are they going to extract a pound of flesh? Meaning, “Okay, I’ll give you a few months, but you’ve got to sign up for another three years.” Like, how egregious are they going to be? Are they going to be really working, or is it they’re just going to look for more ways to extract a pound of flesh from you?
Eric Menke: Not in this environment. I do not believe that’s going to be the case, that you’re going to find an egregious use of their power to extract pounds of flesh. Many of these things are actually already stipulated within the loan documents. There’s default interest, there’ll be default penalties, and the like. But given this particular downturn, and the uniqueness of it, and the broadness of it, lenders are going to be doing everything they can to keep their customers healthy. And they don’t want to kill the patient, so to speak. They just want to get them through to the other side.
So, yes, you’ll have to pay. There’s a price to pay. As I said, this is much different than in good times when you default. The banks, I mean, their loan portfolios, they’re in trouble across the board. There isn’t a lender in this country that is not really figuring out how they’re going to help carry their customers through to the other side. They don’t want defaults. They don’t want loans to be accelerated. They don’t want to have to deal with foreclosure on businesses, not in this environment. Vendors and suppliers are a whole different ballgame, by the way.
John Pennett: Yeah, because you’re the customer.
Eric Menke: Yeah. Right? So, there’s a whole different playbook there. However, again, it’s sort of in reverse in that you’d want to keep your suppliers alive too, especially if you’re a key customer to them. And there is a much greater balance of power in supplier-vendor relationships with a company. And there’s a —
John Pennett: The best example, Eric, I saw one of my clients that’s a pharmaceutical company, and they have a very, very, very large product liability insurance premium. And they said they went back to their insurance carrier and not only asked for extended payment terms, but an outright reduction of the premium. And they said, “We need to figure out ways to cut some costs.” They’re involved in some kind of elective surgery type things, and there are none right now. So, they were aggressive on that.
And I’ve heard certainly the same thing with respect to landlords having candid conversations, to your point earlier, “Listen, we’re going to have a hard time. We’re okay this month, but next month we’re going to have a harder time. Can we do a partial payment? We’ll keep in touch, but down the road, we’re not quite sure what that forecast looks like, and our cash flow availability.” So, having open conversations there as well.
They don’t have any better choices than you right now anyhow, so it’s not like there’s five other companies looking to take your space, and if you miss a payment, they’re going to throw you out. There’s nobody in the queue, so they’d like to keep you there, and like to get something from you. So, I think you’ll see folks open to deferment, and delays, and things like that. Reluctantly, of course, and they’ll rattle their sabers, as you referenced earlier. But I think that’ll happen as well.
Eric Menke: Yeah. This is sort of like a prisoner’s dilemma, right? So, good faith is huge in this environment. When you don’t know what the other party’s thinking, that’s where you can each get into a lot of trouble. Whether it’s your relationship and negotiating tactics with a lender or with a vendor, good faith efforts mean a lot in this environment where there’s so much uncertainty.
And that can manifest in a lot of ways with respect to suppliers. It’s, “Look, I will pay you 25% versus 100% of this invoice. I will defer the balance.” Again, like with landlords, instead of people saying, “I’m not paying rent, period,” they’re saying, “I’ll pay you half the rent,” similar with the lending relationships, to the extent you can say, “I realize the principle is, payments are due of X. I’ll pay you 20% of X.”
Any good faith measure that a company can make in this environment with a party with whom they have to negotiate and live with, long-term suppliers or lenders, that will go a long way. Because where things are so opaque and you don’t know what the other side is really thinking, it creates a whole lot of unnecessary stress and agita where I think you get a lot farther with just a small modicum of good faith effort.
Eric Meisner: Great. Thanks, guys. Our next and last set of questions relates to capital and investors. So, we’re going to take a quick poll. The poll question is, do you have outside investors? A) No. B) Not yet, but we’re thinking of doing a raise. C) Yes, we have investors.
While you poll, I’ll give some of the results of the earlier polls. Right now, most of the audience feels their company is in good shape, which is great news. It’s a mixed bag on whether or not you’re doing forecasting. Some are, some aren’t, and some are in the middle. And then as far as communicating or trying to renegotiate with your vendors and landlords, most of you are not yet talking. So, please take the advice of our panel and start communicating and negotiating with your vendors and landlords. And as Eric said, do it in good faith. It’ll go a long way.
Okay. So, let’s get to our capital related questions for the panelists. In uncertain situations, what’s the best way to communicate with your investors when you’re not sure what’s going to happen in the next couple of months? What kind of conversations should these guys be having with their investors?
William Lieberman: So, we talked about the debt side, the lenders. But on the equity investors, as Eric mentioned, the more you communicate, the better. Right? Going silent is a death knell. It gets them even more nervous than they already are. And things can get really ugly quickly if you go radio silent. So, the most important thing is to communicate, “Here’s where we are.”
Let’s say you’re reforecasting, “Here’s our new forecast. Here’s what we’re doing about it if there’s a downturn for three months, or six months, or 12 months,” whatever it might be. “Here’s how we’re going to cut back if we need to, or pivot if we need to. But we also want to get your input. You guys are strategic advisors to us. You may be on the board. What do you think, and how have you been through this before? And what pearls of wisdom would you have for us as we attack these issues that are in front of us?”
In addition, let’s say you had quarterly board meetings, or something a little bit more formal. Get a little bit less formal, more frequently. So, instead of doing quarterly, maybe you do monthly or every six weeks. I’ve had clients where in times of distress, they went to monthly, just real quick, one-hour, two-hour status calls. And it was very helpful because the investors then knew, “Here’s what’s going on. Here’s what we could do to help,” and they weren’t caught unaware. If a situation got worse, they knew it was coming, and we could provide as much information ahead of time. So, those are all key tips that I think are really important in times like this.
Eric Meisner: Thanks, William. So, the poll numbers just came in. Most of the audience do not have outside investors yet. So, knowing that, let’s go to the next question. What sources of capital are available to companies today that are in need of capital, or refinancing growth capital, or venture capital, or private equity deals happening right now? Or is everything shut down?
John Pennett: So, you’ve certainly read a lot about and heard a lot about venture capital spending more time, as William just referenced, with their portfolio companies and reserving more of their funds for their existing portfolio companies. So, they’re still looking. I would say the venture capitalists that I’ve talked to have not changed their pace of looking at deals. I think their availability to close the deals is slower because they’re spending more time trying to be strategic with their existing portfolio companies. So, the process is slowing. But I don’t think they’re closed for business, for the most part. It’ll be interesting down the road when they’re trying to raise their next fund and things like that. So, this has a big cyclical effect on the whole industry.
I would say probably the most popular that we’ve seen is really some sort of a bridge facility from existing investors, where there are investors on the outside. Most of this audience don’t have that. So, I would say there, in this situation, we’re probably seeing some vendor financing, so vendors helping to give some extended terms, and a little bit of some purchase order financing where there are actual orders that do need to be filled. I’d say that’s probably a lesser extent.
Eric Meisner: Eric or William, anything to add? If not, that’s okay. So, we’re on the clock here. I’m going to jump to a question we have from our audience. How do you evaluate the pricing discount mechanism? Is the short-term play to push sales through the door versus the loss of margin integrity?
William Lieberman: That’s a good question. In my opinion, it comes down to how much do you really need to have the cash. So, how much do you think that it’s important to accelerate cash receipts, i.e. discount, so that we could get the cash in the door for, say, the next few months and have a much lower margin on that cash, versus what’s the impact on the long-haul two-year margins from doing that?
Now, you could say, “Hey, look. We’re having a COVID-19 sale,” as it were. Or word it in such a way to say, “Hey, look. As you can imagine, we are providing a discount on our services or products for the coming quarter because, a) we want to be helpful to our customers.” So, you pitch it as sort of a win-win for them, “We want to help you. We’re going to lower our prices for a short period of time. It helps you. It helps us, because we get those revenues sooner than we would otherwise.” Yes, you will impact your margins. But I don’t think anyone’s going to look askance at the fact that you had lower margins for a short period of time, versus the impact to your business by getting that cash sooner than later.
John Pennett: I think that’s the candid conversation again, right? So, you’re saying, “We’re trying to be responsive in this environment to help you and to help us at the same time. Let’s help each other.”
William Lieberman: Exactly.
Eric Meisner: Great. Thanks, guys. So, that actually concludes our session for today, right on time. We’d like to thank our panelists, our audience as well, for participating, and especially our friends at New York Tech for having us present today. If you have any follow-up questions, again, the contact information of the panelists will be sent out following the meeting, as well as the recorded link, if you want to replay this later. Thanks again, everyone, and stay safe.
Andy Saldana: Awesome. Thank you so much, everybody, for participating in today’s panel. Again, thank you to all of the attendees. Again, stay safe. Really great advice today from the panelists. It’s a lot of what I’m hearing in the ecosystem as well around communication, frankness. And as someone who is running a business as well, those are hard conversations to have, just from your ego perspective.
So, just understand that everybody is in the same boat now, and don’t be afraid to have those conversations with your important partners and players in the ecosystem. We’re all here to help. New York Tech Alliance is here to help. And we’ll be, again, sending out all of that information about the panelists and the recording to everybody who registered for the event later this week. So, thank you, again. Have a great day, and stay safe. Thank you.