The global COVID-19 pandemic has brought the world’s economy to a grinding halt. Virtually every person, business and industry has been affected to some extent, and the economic impact and recovery will likely last for months or years. Uncertainty over how long this “new normal” economic environment will last causes significant short- and long-term risks for businesses.
These circumstances are forcing companies and their boards to respond quickly to immediate challenges facing their organizations, such as unexpected revenue and cash flow disruptions. It is critical that businesses analyze their financial condition, market position, contingency plans, and the going-forward risks and opportunities presented by the global pandemic.
Although relevant considerations vary widely by industry, location and other factors, businesses and their leaders should generally be prepared to analyze and address the following issues:
- Direct Financial Impacts. No business forecasted for this pandemic, but every business must address its effects. What are the immediate and long-term impacts on the business and its going-forward strategy? Is the business sufficiently liquid to withstand volatility in revenue, expenses and income? Does the business have access to additional capital or credit, and should those sources of liquidity be tapped now to avoid a future cash flow crisis? What nonessential expenses can be deferred or avoided during the current economic environment?
- Customers and Suppliers. Businesses must critically analyze and monitor their most essential business relationships, including customers and suppliers, and the issues related to each. Are our customers able to fulfill their contractual obligations to us, and vice-versa? What contractual relationships are essential to the business? What contractual counterparties represent a significant default risk? What are the contingency plans if such contracts are breached? How have our suppliers been impacted, and what actions can the business take now to ensure its supply chain is not disrupted? Should communications between the company and these vital counterparties be more consistent?
- Employees. In the absence of adding liquidity or government assistance, precipitous drops in demand and revenue leave many businesses with few options besides downsizing and terminating or furloughing employees. How can a downsizing be structured to minimize business disruption and allow the business to “ramp-up” when appropriate? Should the business reduce executives’ compensation during the current environment? Are adequate contingency plans in place to address absences of key personnel due to illness or downsizing?
- Communication. In this turbulent and uncertain environment, communication is more important than ever. Does the company have a consistent and coordinated message to all its stakeholders, including employees, customers, suppliers and creditors? Is that messaging accurate and does it continue to build the company’s credibility with key constituencies?
- Government Assistance. Federal, state and local governments are taking unprecedented steps to support businesses during the pandemic. Businesses should evaluate whether they qualify for relief under the federal CARES Act or similar state and local governmental assistance programs, and if so, what is the expected scope and timing of that financial support? What immediate actions can the business and its legal counsel take to ensure it is maximizing its access to potential government assistance?
- Insurance Coverage. Many businesses have existing policies that include business interruption or similar coverages that could offer needed liquidity. Firms should consider immediate steps to analyze existing insurance coverage and submit appropriate claims. What are the possible recoveries and timing under such claims, and how does that affect the company’s going-forward strategy?
- Restructuring. Financially distressed businesses should consider whether a strategic restructuring can add value and deliver the “breathing spell” the business needs to reorganize and emerge on stronger financial footing. Depending on the specific facts and circumstances, a reorganization could occur in or out of the Chapter 11 bankruptcy context. There are a number of insolvency and reorganization proceedings available to financially distressed companies, and in many cases, invoking their protections gives the company additional rights and opportunities that do not otherwise exist. Should the business retain a restructuring professional to advise on the business’s bankruptcy and restructuring options?