For small-business owners, hard decisions become personal
Meganne Wecker got a sense in January of the economic blow coming to her family’s furniture business from her suppliers in China.
Wecker, the president of Skyline Furniture, a 74year-old manufacturer in the Chicago suburbs, heard from her partners in China about the economic devastation caused by the coronavirus outbreak. Skyline, which has about $50 million in annual revenue, sells to retailers like Wayfair and Target, and the supplychain loss could deliver a huge blow.
She prepared herself for the worst, but it was still gut-wrenching when she and her father, Ted Wecker, Skyline’s chief executive, had to shut down the company as the U.S. economy came to a lurching halt. They decided in midmarch to close both factories and stop paying themselves, but they continued to pay all 300 employees for two weeks.
But time is running short, and Meganne Wecker, like other small-business owners, must determine how to keep her company afloat as stores and restaurants are shuttered, manufacturing comes to a standstill and people are told to stay home. Some choices — pay cuts, furloughs, layoffs — could seriously harm employees who have worked for them for years.
The damage is already becoming apparent: More than 6.6 million people filed new claims for unemployment benefits last week, the Labor Department said Thursday, surpassing the record 3.28 million claims from the week before.
For Skyline, it’s unclear when the state of Illinois will let it reopen. “Our top two priorities were the health and safety of our employees and how we are going to come out of this with a business that’s still operating and intact,” Wecker said.
She is hopeful that she can get federal funds through a relief effort known as the Paycheck Protection Program to pay most of her employees.
Maneuvering through the crisis is much harder for smaller businesses, which cannot afford the raft of advisers, lawyers and accountants that large companies have to guide them.
The chief executives of Visa and Morgan Stanley have publicly pledged not to lay off any employees this year. That’s reassuring for the 77,000 workers at the two firms.
But the gesture was comparatively easy for finance companies, which have cash reserves, lines of credit and an ability to borrow more money. They also have businesses that will generate enormous fees in the downturn.
The retail industry, on the other hand, was struggling well before the pandemic forced retailers to shutter stores nationwide. Companies like Macy’s and Gap, which combined recently laid off more than 200,000 employees, lack the same cushion and cannot generate revenue with their stores closed.
For small-business owners, keeping everyone employed may not be possible. But they will also have to determine what it would take for the company to enfargo dure the economic slowdown and emerge after the crisis as a viable business.
Even entrepreneurs who have the personal wealth to weather the pandemic are contemplating what their business will look like in a different marketplace.
Bob Parsons, founder of Godaddy, the internet domain name company, said he was trying to manage a steep drop in income.
He had parlayed the billions he made into 18 businesses with 900 employees, but he said most everything was shuttered, including his golf course, the Scottsdale National Golf Club in Arizona, and his Harleydavidson dealership. His holding company, YAM Worldwide, includes a private lending arm and 2.1 million square feet of commercial real estate in Phoenix. “One of our biggest deals is we own shopping malls,” he said. “That’s a lot of restaurants, nail shops, fitness centers, and not a lot of rent is going to come in from them.”
His initial goal was to keep most of his 900 employees employed through April and then re-evaluate.
Brian Ascher, partner at Venrock, a venture capital firm, recommends pulling off the Band-aid quickly. “If you have to cut, the goal is to cut once, cut deeply and do it quickly,” he said. “Then you have to treat the remaining troops really well, so they have psychological safety.”
Rent is an area ripe for renegotiation. Parsons is expecting less rent from his tenants, and Ascher is encouraging companies he’s invested in to ask for rent reductions. He has seen landlords cut rents by 10% to 20% but also up to 50%.
Another strategy for business owners is to stretch the cash they have. Companies with 18 months of cash are in the best position, and those with 12 months should try to stretch it to 18 months, Ascher said.
But they must spend the cash wisely, said Bob Buchanan, head of business transition planning at Wells Private Bank.
“If they survive in the short run but their decisions put them in a bad position, it doesn’t matter,” he said. “If you push off paying your suppliers, will they still be in business in six months from now? Many people haven’t thought through that.”
Research from Next Street, an advisory firm focused on small businesses, found that 25% cannot make it past 30 days and another 25% do not have enough cash to get past 90 days. The Small Business Administration loans that forgive expenses like payroll may not arrive quickly enough to help.
If there’s a silver lining for private businesses, several venture capitalists noted that recessions spur innovation.
Russo’s, a 100-year-old fruit and vegetable company outside Boston, lost half of its revenue in 24 hours when the universities, public schools and restaurants that it supplied closed. Its retail store remains open, and business is increasing.
Karen Russo, a fourthgeneration member of the family that owns the company, said she had long wanted to create boxes filled with a variety of fruits, vegetables and other products that could be placed directly in the trunk of a customer’s car. Her father, Tony, who owns the company, resisted but finally agreed two weeks ago. Now they have four types of boxes, which are selling well.