0. Introduction.
In the current health crisis, facing the economic and financial repercussions it will leave, and the uncertainty surrounding when it will come to an end, it is necessary to act in advance by preparing a business plan to ensure that appropriate action is taken to mitigate the impact it will have on businesses.
To date, a third royal decree has been published to extend the state of emergency a further 15 days, leaving most of us with two main questions: how long are these restrictions going to be in place for and how we will return to normality once they are lifted.
Our firm suggests addressing some very specific questions. The answers will help define the most appropriate measures to implement in each company. These questions are specified in point three of this article. However, we thought it would be useful to write about the circumstances that we believe make these questions relevant.
1. Worries and matters to consider.
Due to the current situation, financial activity around the world has been virtually paralysed. Almost all the countries in the world have put in place lockdown rules to prevent people from leaving their homes unless they have a justified reason. Airports have seen commercial flight activity reduced to an all-time low. Tourist accommodation has been closed unless deemed essential.
These measures have bought the Spanish tourism sector to a standstill. All these restrictions were put in place on March 14, 2020, when the state of emergency, which was initially meant to last 15 days, was declared. Subsequently, these 15 days were prolonged for another 15, and on Saturday, 11 April 2020, the Official Gazette published Royal Decree 487/2020 which extended the state of emergency, with the same restrictions and limitations as before.
This has led to many unanswered questions. The main one on everybody’s mind is: when is this all going to end? Also, once lockdown is over, are we all going to be able to leave the house at once or will it be done in several phases? Will the most crowded businesses be opened immediately, and if so, will they be allowed to fill up completely from day one? Will people be scared to go back to normal as soon as the restrictions are lifted?
Meanwhile, other questions arise, such as: will the economic activity recover soon? Will the recession that stems from this health crisis affect the economy for a long time once we overcome the health crisis, or will normality soon be restored?
Well, no one is sure of the answer to any of these questions. Therefore, no one knows when businesses will open again, nor when full activity will be recovered. No one knows whether tourists, national or international, will be able to travel to tourist destinations as soon as this situation comes to an end. Will fear or financial circumstances lead them to reduce their free time and holiday expenditure?
2. Experts opinions.
Economists and consulting firms believe that there are three possible scenarios, depending on when the lockdown is lifted and how we are permitted to return to normality.
The three scenarios being considered are the following: the first, with a V-shaped crisis curve, which implies a fast fall and an equally fast climb; the second with a U-shaped curve, foresees a fast fall and a slightly slower recovery; and the third one with an L-shaped curve, foresees a fast fall and a very slow recovery. Along with the scenarios mentioned, prestigious consulting firm “Deloitte” presents a fourth forecast, which would involve a curve shaped like the “Nike” logo.
All these predictions stem from three possibilities based on the date the restrictions are lifted, and experts predict several scenarios. The first foresees the restrictions being lifted throughout May, the second predicts the restrictions will come to an end in July and a third scenario sees the restrictions staying in place until October.
Based on concerns voiced by experts and the numerous possibilities, we believe that companies and self-employed people should ask themselves the following questions in order to assess the viability of their businesses.
3. Questions a company should a company be asking itself in the current situation:
Given the uncertainty of what is going to happen in the coming months for the reasons stated above, we believe companies and self-employed people should ask themselves certain questions about their businesses. These matters are addressed through the following questions, the answers provided will make it possible to draw up strategies, make decisions and implement the most appropriate measures in each case.
3.1. What cash or other reserves does the company have?
This question refers to cash, money in current accounts, deposits, etc., but also investment funds, shares, bonds, etc. In other words, the economic resources the company has that can be used within a reasonably short time.
3.2. What payments does the company currently have to make?
This refers to payments to suppliers, salaries, social security, taxes, leases, loan repayments, etc…
3.3. Concerning the cash available and the payments that the company must make, how long can the company survive without operating (i.e. being closed or practically closed)?
This question aims to find out how long the company can be closed or not making any money for, whilst still meeting its payment obligations with its financial resources.
3.4. To maximize the period the company has no income, is it possible to reduce the company’s expenses or negotiate payment obligations?
This question aims to see if any expenses can be reduced, such as salaries and social security (through the appropriate job retention scheme), the costs of rent or other current contracts (if the rent or the payment deadline can be negotiated) or any other expenses incurred by the company.
Furthermore, it is also worth considering the possibility of negotiating payment commitments with creditors, such as committed payments to suppliers, loan and credit instalments, etc.
3.5. For specific cases, can the company sell any of its assets to achieve liquidity?
This option should also be considered, but to avoid hasty decisions that could lead to financial loss, it is important to make sure that the asset sale price is the true value of the asset.
3.6. Is it viable for the company to borrow in order to achieve liquidity to ensure survival?
This question aims to analyse whether it is viable for the company to apply for a loan, in order to achieve the liquidity necessary to enable the company to meet any payments that cannot be reduced or deferred, without resulting in over-leverage that would subsequently constrain the company.
Each company or business has its own economic and financial figures. However, we believe that it is useful to analyse each company or business’ specific circumstances to then be able to study the different possibilities and measures that each of them should implement.
3.7. Is it possible to achieve liquidity from other sources?
Here we consider the possibility of finding new investors or “business angels” that want to invest in the company in exchange for future profits, or the possibility of obtaining a loan from a third party outside the company, for example, a participative loan, or the possibility of merging the company with another company, etc.
Consider all the above in addition to any aid and/or subsidies that may be available, but alone do not seem enough to overcome the situation.
3.8. Can the company’s liquidity or the liquidity that could be achieved remedy the current situation?
The purpose of this question is to analyse whether it is feasible to achieve the necessary liquidity and/or secure new debt commitments. If the company cannot achieve sufficient liquidity, or if new borrowings are likely to overwhelm the owner, it is very likely that it will have to initiate an insolvency procedure to try and rescue the company or, ultimately, to liquidate it. Sadly, most companies that file for bankruptcy end up in liquidation, however filing for bankruptcy in good time increases the chances of the company not having to go into liquidation.
4. Examples with calculations, according to different scenarios,
In order to determine what liquidity a company needs; you must calculate the expenses and payments that the company is liable for and the reduction of income whilst the restrictions are in place. This can be done by estimating future income once the state of emergency is over and normality has been restored. We believe that the sales figures and business recovery will vary depending on when the restrictions are lifted. However, the following is just an example and each company must analyse their own situation.
4.1. Example of data of a company and restrictions in place until the end of April.
The following chart shows an example of the situation a company with the following figures could be in, based on the assumption that the restrictions are lifted at the end of April, so, by May:
As you can see, in this case, the company will end the year needing extra liquidity of just over 46,000 euros, and throughout the year it will need to have up to 152,000 euros available to meet its payment obligations.
4.2. Example of data of a company and restrictions until the end of June.
Here we are looking at estimated figures for the same company, assuming that the restrictions end in July:
In this case, at the end of the year the company will need liquidity of almost 90,000 euros, although the maximum liquidity needed throughout the year would be just over 115,000 euros.
4.3. Example of data of a company and restrictions until the end of September.
The following table shows estimated figures for the same company, based on the assumption that the restrictions end in October:
Lastly, in this case, the company would end the year requiring almost 172,000 euros in liquidity, whilst needing a little more than 177,000 euros available during the year.
5. Possible solutions available in each case:
Although each business is different, and therefore each one must be treated individually, the most significant payments and expenses are generally staff expenses; leasing expenses; premises or offices; purchases of goods; fees for professional services; loan or credit repayments; etc.
So, depending on the expenses or payments in question, the measures that can be implemented by the companies are different:
5.1. Staff expenses.
When it comes to staff expenses, the are several job retention schemes provided for by labour legislation, such as reductions in working hours, contract suspensions, furloughing staff (ERTE’s), etc. These employment measures offer companies several possibilities that include not having to pay wages in contract suspensions or paying the proportional part of the wage for reduced working hours, not paying social security for ERTE’s which include suspensions due to force majeure or paying the proportional amount for reduced working hours, etc.
5.2. Leases, purchases or professional services.
The law does not provide any measures to suspend or reduce the payment of commercial leases. There are regulations in place for delays on rental payments for main residences, meaning companies cannot take advantage of these measures. If a company sees its income reduced, there is always the possibility of negotiating an agreement with the landlord, either to reduce the rent or to defer the payment.
The same lack of concrete measures concerning leases by companies is apparent in the case of supply agreements for goods – for example, those requiring a minimum purchases throughout the year in order to maintain certain purchase prices or volume discounts – and other contracts for the provision of services. Therefore, in these cases, it is equally important to negotiate with each supplier or service provider concerned.
5.3. Loans, policies, mortgages and other financial credits.
Another equally important point is the loan repayments that companies must take on. In this case, the most appropriate solution is to restructure the company’s debts.
It is well known that the government has approved guarantee lines of credit for banks to grant ICO loans. However, these ICO lines must be used to finance the companies’ needs and cannot be used to repay or cancel other pre-existing loans. This is because ICO loans are granted at a lower interest rate than those normally present in normal credit operations and carry a good percentage of the State’s guarantee. Therefore, ICOs are intended to be used for current needs arising from Covid-19 and not for companies to exchange their previous debt for a new cheaper one with state guarantees.
5.4. Other possible solutions.
Depending on each companies’ circumstances there are several solutions. Thus, other possibilities that some companies have could be:
(I) Selling unnecessary assets.
(II) Selling businesses, activities or branches of activity.
(III) The involvement of funding partners or “business angels”.
(IV) Companies merging into one to strengthen their liquidity.
(V) Loans provided by the company’s shareholders.
(VI) Loans provided by third parties outside the company, without the need for them to be financial institutions, e.g. through shareholder loans, etc.
5.5. The solution that no one wants: Bankruptcy proceedings.
Lastly, if the company cannot foresee a viable solution as the liquidity it has or is able to achieve is not enough to salvage the situation, the last alternative is to file for bankruptcy before the owner gets into further debt. Those who are not familiar with bankruptcy proceedings or have no experience in this field may believe that bankruptcy proceedings solely aim to liquidate the company, but the truth is that the main aim of this process is to refloat the company.
Statistics show that most companies that file for bankruptcy eventually go into liquidation, but it is also true that a great majority of these companies filed for bankruptcy too late, when the company could no longer be rescued in any way. The main purpose of bankruptcy legislation is to preserve the company, but this legal mechanism must be used when the law requires so, and not when there is no other alternative. In many cases, bankruptcy proceedings have been the only legal method to dissolve and liquidate a company, as due to the existence of several creditors the company could not be liquidated without bankruptcy proceedings. Given these circumstances, the outcome that such a large majority would end up in liquidation was largely expected, thereby impacting these statistics that show that most bankruptcies end up in liquidation.
6. Conclusions.
Under these circumstances, the best possible solution must be studied taking in to account each company’s situation. Please note that each of these companies will require a specialised, detailed analysis of their specific situation. All the necessary contractual documentation must be prepared and verified, especially when the operations involve mergers, new partnerships, the sale of assets, sale of businesses, activities or subsectors of businesses or taking out equity loans. This does not take any importance away from the preparation and/or verification of the documentation relating to other measures, such as the ERTE’s, the suspensions or reductions of working hours, negotiations of leases, provision of services, or sale of goods and credits between shareholders and companies (the latter, especially from a tax aspect as they are related-party transactions).
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