Mothballs and Spring cleaning

March 2020

Rating system:
Reading time (1-10 minutes): 4 mins? 3 months?
Sophistication level (1 (idiot) – 10 (expert)): 4
Entertainment value (1 (turgid) – 10 (side-splitting)): 2 (don’t let this put you off…)

As a corporate/commercial solicitor who helps people put business deals together, there is a limited amount I can do to help them deal with the immediate problems we are all facing. With a lot of normal social and business activity shutting down while we ride out the Coronavirus storm (and this will probably go on ebbing and flowing for quite a while until a vaccine is rolled out), we are all looking in various degrees to mothball our assets and resources so we can get to use them again when the clouds lift. I may be able to help businesses which are generally looking to rearrange their affairs to help them keep things going, for example by renegotiating existing contracts and financing arrangements, or restructuring their businesses or the ownership of their businesses. I may also be able to help with some contract law issues such as force majeure clauses, insurance clauses, material adverse change clauses, change control clauses, termination clauses and the law of frustration. For a fuller list the various areas of corporate and commercial law which I can help with have a look here.

When you have some spare time from firefighting, and working out how to make use of the various packages the government is making available, it might be worth spending some time during this mothballing period thinking about possible things you can do to come out fighting at the other end.

Much of the following article is a re-write of one I wrote back in 2009 when I thought I should do an article about things to think about to help deal with a recession.

The economy is going to shrink – there will be less money going around to feed people who want to earn it. Businesses will therefore need to walk a tightrope:

• On the one hand they must do their best not just to keep market share but to increase it just to keep levels of business up;
• On the other hand, they need to manage, and if necessary reduce, their overheads and their reliance on borrowing.

In more normal times, a push to increase market share would usually coincide with increased borrowing and investment. It might involve a business acquisition strategy. It would certainly usually involve an increase in sales and marketing costs. It would also usually go arm in arm with increased business levels and increased investment in production, distribution and other costs. But this is not necessarily so much the case in a shrinking economy! The priority when you come out of mothballing AC (After Coronavirus) will be to bring levels of business up to keep existing assets utilised and to cover existing costs.
The marketplace is shrinking in another way as well – in a way which isn’t just temporary like the current economic crisis. The internet is making the world a smaller marketplace which everyone can compete in. It is getting harder and harder to grab people’s attention in the middle of all the other ‘noise’ being thrown at them. It is a smaller marketplace but there are a heck of a lot of stalls. But it also presents opportunities for smaller businesses to punch above their weight.

In these new conditions, what can businesses do to survive and then thrive when things get back to (the new) normal? Some food for thought

Many SMEs have the management structure, drive and operational flexibility to enable them to identify and take advantage of the opportunities that are available. This can give them an edge over larger and more cumbersome businesses.

Business organisation basics

The next few weeks or months may be a good time to look at your business models, by which I mean both the way in which the ownership and management of your business is structured, and the ways it goes about business.

Look at your management structure:

• Is it going to give you the edge?
• Are all the right people in the right roles?
• Do you have the best possible lines of communication and decision-making?
• Look at your business operations and assets:
• Is your business too unwieldy and unfocused?
• Could it be broken into different more stream-lined businesses?
• Are some parts of it more successful than others?
• Are there some parts of it you could get rid of so you can focus your resources on other parts?
• Can you reorganise your business so that the failure of one part won’t bring the rest down?
• Would it be easier to raise investment or new finance by separating attractive areas of your business from riskier parts?
• Would it be sensible to protect some valuable assets by ring-fencing them?

With values down, now is a good time to be thinking about restructuring your business – ask any accountant!

Explore ways to reduce overheads or financial exposure without compromising on activity.

Can you cost-effectively outsource any business needs which you currently employ as a fixed cost or buy in from time to time as an unnecessarily expensive resource? For example IT infrastructure and support, marketing resources, accountants, lawyers, HR expertise?

Explore alternative ways to fund your business. With banking and venture capital finance in short supply, many business owners with balance sheet or cash flow problems will be looking at friends and family as a source of finance. Can you create an attractive investment proposition for them? Privately owned businesses are not generally the best form of investment vehicle for investors who are not actually involved in running them, hence the expression is usually ‘friends, family and fools’! But with most other investments currently offering very low interest rates, now is as good a time as any to invest in a private company, whether as a straight loan or an equity investment. Tax incentive schemes such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme can provide good tax incentives for equity investment.

Business development

With so much competition it is more important than ever to invest in engaging with your customers so that you don’t lose them once you’ve got them. What are you doing to keep people remembering you so they will think of you when they need the kinds of goods or services you provide? (I do the odd newsletter.)

Think carefully about where you are going to get your new customers from. Traditional marketing methods such as advertising, direct mail and cold calling are in many cases becoming less effective. The best way to make more noise than the competition may be to raise your SEO rankings. But does this make the right noise for your business? Aren’t all businesses the same anyway? How do you differentiate yourself from your hundreds of competitors? About half the revenue of all SMEs comes from word of mouth marketing/networking, ie in effect relying on your ‘engaged’ customers and on other people in your social and business communities to act as your ‘outsourced’ salesmen. What works best for your business?

Explore ways of doing business which might extend and increase the market in which you sell your goods or services:

• Do you have a brand or intellectual property rights which have a potential value which you could be exploiting?
• Could you licence other businesses to promote their goods or services using your brand or IPR?
• Could you franchise your brand and business processes?
• Could you create other new sales channels?
• Can you appoint and incentivise sales agents or distributors rather than manage and fund the entire process yourself?
• Do you have a receptive customer base which you could leverage by promoting other goods or services to them, perhaps ones which are complementary to your own goods or services?
• Do you know any businesses which provide such goods or services and could you team up with them?
• And conversely could you also be working with them so that you can promote your goods and services to their receptive customer base?

It’s not what you do; it’s what the customer wants. What are your target customers really looking for? Is this the same as what you provide?

• Could your selling proposition be stronger if you combined it with the selling propositions of one or more other businesses to address your target customers’ real needs?
• Could you create combined packages which might be attractive to customers? Customers don’t want to have to find multiple different suppliers to service what they see as one business requirement. Can you create a one-stop shop for them by venturing with or sub-contracting to other businesses?
• Could you be working with complementary businesses to target new customers or to increase sales to existing customers by servicing other needs of theirs?

The power of collaboration

You may have got the message by now that quite a lot of what I’m talking about involves what can be done by teaming up with other people and other businesses. Why not explore ways to combine forces/share resources or opportunities with other businesses? The more you optimise the use of available resources on any venture the more likely it is that the venture will succeed. If your business does not have the best resources for what you want to do, then consider whether you can team up with another business to share its resources.

• Are there any resources which you could be sharing with others?
• Could you second resources to each other (eg staff, equipment, premises?)
• Are there any advantages of scale in teaming up with them?
• Could you club together to invest in new marketing or sales channel initiatives?
• Could you spread the risk of tentative new business initiatives by sharing them with other businesses?
• Could you club together in some way for extra buying power?

Don’t be afraid of talking to the opposition. If you are both relative minnows in your market, explore ways of working with each other to become slightly bigger fry, particularly if you have complementary products or services, or simply complementary management skills – you might have the best organisational skills, the other might have the best sales skills.

As well as looking to joint venture with other businesses for increased marketing capabilities or sharing of resources, it can of course also help to team up with other businesses to take advantage of their financial strength.

What business models can we use?

Once you’ve decided on entering into some kind of venture, you need to decide how to go about it. There are numerous different business models or structures which you can put together. You could consider any of the following or any combination of them:

• Joint venture companies
• Partnerships/LLPs
• Joint venture contractual arrangements
• ‘Members’ organisations
  • companies limited by guarantee
  • mutual societies
  • trade associations
  • consortiums, clubs, networks
• Licensing/franchising
• Distributor/agency
• Outsourcing
• Sub-contracting
• Mergers

I’ll be going into a bit more detail in my next newsletter about possible joint venture structures.

Conclusion

This period of enforced isolation may be a good time for thinking about new opportunities to protect your market share in the current shrinking marketplace and to be best positioned when we come out the other side.

Please also take time to find ways to keep yourselves physically and mentally fit. For my part, as my normal Summer of cricket and golf seems to be out of the window I have ordered a skipping rope online and plan to improve my guitar playing and origami folding!