Putting Your Business into Hibernation

Covid-19 Business Support

New Federal Government Business Support Measures

The government has announced further business support measures in the form of a $1500/fortnight wage subsidy, with the aim of keeping people employed in their current roles. Much of the government’s focus on business support has been on helping businesses to survive a period of hibernation. This strategy won’t be viable for all businesses, so who will it benefit most?

The government has also announced a 6-month moratorium on evictions for both residential and commercial tenancies. More details about the enforcement of this moratorium will be announced in the coming days, with hints that it will relate to access to the financial stimulus measures announced. Commercial Tenants and Landlords are being asked to negotiate together to maintain business viability where possible.

Things to Consider

Your Commercial Lease Arrangement

Business owners seeking to ‘mothball’ their business may need to negotiate a moratorium on debts and other arrangements with stakeholders such as landlords, financiers, trade creditors, the ATO and employees. The expected outcome for the business from liquidation or bankruptcy in conjunction with the current economic circumstances will provide a basis for negotiating arrangements with stakeholders.

If commercial tenants go out of business, landlords will be unlikely to obtain replacement tenants whilst disruptions from coronavirus  continue (and perhaps for a significant period thereafter). In these circumstances, it will be in the landlords’ interests to agree to rent relief arrangements, which will enable their tenants to resume trading at some stage and continue their tenancy.

Australian banks have also just introduced commercial loan relief measures that will see commercial landloards get debt relief for up to 6 months, if they don’t terminate leases or evict current tenants for rental arrears due to COVID-19.

What are the Lease Implications?

Have you got personal guarantees? If there’s a shortfall in the rent, you might be personally exposed, so you’ll need to be careful about how you approach the situation and consider this exposure as part of any negotiations that might need to occur.

 

Is Your Business Going to be Able to Re-Open?

If your business goes into hibernation, will your customer base be there when you reopen? Hundreds of thousands of people have lost their jobs, and even with the increase to the Newstart rate, discretionary spending will be limited. Consumer confidence fell by 27.8% last week, bringing it to a 30-year low and it’s not likely to improve in the foreseeable future.

 

If You’re in a Shopping Centre / Strip Mall What are the Other Businesses Doing?

If all of the businesses in your shopping centre are closing down permanently, you risk reopening to a ghost town. The effect of vacant stores in a shopping centre or mall can significantly reduce foot traffic and reduce the drawing power of the mall as a shopping destination.

 

Your Communications During This Time

We understand that updates on the situation are hard to keep up with, but the quicker you are with communicating any changes you need to make to keep up with the continually moving goalposts, the more likely you will be able to maintain a positive sentiment among key stakeholders.

 

Customers

Have you been clear at every step of the restrictions about whether you’re still trading and what you’re doing to protect your customers? Ensuring customers stay informed about your continued operations is tantamount to survival. You have a better chance of preserving your existing customer relationships over a period of hibernation if you’re communicating and engaging with them consistently. Whether you have adapted your offering, or you’re able to continue trading largely as usual, your loyal customers should be the first to know.

 

Creditors

If you’ve taken the newly relaxed insolvency rules as a chance to take a breather and reassess your supply relationships, you need to be communicating that clearly with any creditors involved. This amnesty will be a lifeline for some business owners, but it doesn’t guarantee your creditor relationships. If you’re struggling and need flexibility with payment terms or to restructure your supply chains, an open and honest discussion still needs to occur.

 

Employees

If you’re not sure where your business is headed, or whether this is a temporary shutdown, you should communicate that to your employees. If you’ve given them the impression that their jobs are safe, you should be absolutely certain that’s the case. In a similar vein, if you’ve realised that you need to reduce staff numbers to stay viable, don’t put off that conversation, as resentment will build the longer employees feel like they’re being kept in the dark.

The wait time for unemployed persons to apply for and begin receiving payments from Newstart has blown out significantly, so the sooner you communicate with your employees and give them their separation certificate, the sooner they’ll be able to continue paying their bills.

If you’re intending to reopen after a period of shutting down, you’ll want to maintain a positive relationship with your staff members, as they’re often a valued point of contact for your most loyal customers. The most important thing is that you have these discussions as soon as you can, so your employees can be fully informed when making important life decisions in this difficult time.

 

Can you trade online?

Adaptability in this situation is so important. If your business already had a strong online presence and good e-commerce infrastructure in place, you’re much more likely to be able to divert your efforts into online promotion and be able to make it through to the other side.

However, if you’re a service business and/or not able to adapt your offering to be able to sell goods online, you may need to reconsider the viability of hibernation as an option for your business.

If you are able to adapt your offering to be suitable for online sales, you also need to consider how much this will cost and how much of a change in revenue is likely to occur. If you’ve never really had a solid online presence, you will likely experience a significant reduction in sales revenue, which could be devastating to your cash flow, even with significantly reduced overheads.

 

Will you have continuing financial obligations during this period?

Even if you’re able to negotiate a rent decrease or a rent-holiday with your landlord, as a business owner you’ll likely have a number of ongoing financial obligations to keep up with in the midst of a significant downturn in revenue. Take into consideration and cash drains such as:

  • Loans on equipment
  • Cashflow loans (often with high interest and onerous repayment terms)
  • Supply agreements
  • Phone contracts
  • Internet Contracts
  • Electricity

It all adds up, and in a couple of months’ time, something as seemingly insignificant as your regular phone bill could be what tips you over the edge.

 

Have you Communicated with your Financiers?

Some banks are allowing a pause on mortgages for a limited period. This option needs to be considered with great care, as a pause on repayments doesn’t exempt you from accumulating interest on your loan, so you will end up having to make larger repayments when the pause is lifted.

If you’re only just getting by at the moment, and business is unlikely to pick up significantly after restrictions have been lifted, this option may get you through to the other side, only for you to buckle under the new repayment rates at the other end.

 

Final Considerations

We urge business owners to exercise great caution in weighing up their options. Although it might be tempting to defer your loans, dip into your super and try to keep things ticking over, now is the time for a serious reassessment of your position and an evaluation of what kind of market you’ll be returning to once restrictions have been lifted.

If your business is struggling in these difficult and rapidly shifting circumstances, we are here to help. As we always have, we are offering free and confidential, no-obligation consultations to assess your options. Call 1300 023 782 or email team@cdrta.com.au to speak with an experienced consultant.

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Craig is the principal consultant of C&D Restructure and Taxation Advisory and has been working in the industry since 1999. Having established C&D Commercial Partners in 2015 the precursor to the current business.

Post Author: Craig Dangar

Craig is the principal consultant of C&D Restructure and Taxation Advisory and has been working in the industry since 1999. Having established C&D Commercial Partners in 2015 the precursor to the current business.

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