BiggerPockets Business Podcast

BiggerPockets Business Podcast 47: Coronavirus: Business Strategies to Adapt, Dangers to Heed, and Opportunities to Watch for With Andrew Sherman

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COVID-19 has presented challenges for all of us—not the least of whom are those who own a business or are in the process of starting, growing, or scaling a business.

In order to provide as much support and insight to our listeners as possible, we recorded this episode yesterday with Andrew Sherman, a prominent Washington, D.C. attorney, business school professor, and author of 26 books on every aspect of business.

Andrew shares his thoughts on where the economy goes next (will this economic event be “V-shaped” or “U-shaped”?), what business owners can do TODAY to best navigate the crises, and the crucial importance of risk management and emergency preparedness.

Don’t own a business quite yet? There’s still value here: Andrew outlines questions to think through if you plan to start a new venture this year AND shares what he believes to be the opportunities that are likely to arise over the next several months and years.

We hope you enjoy this episode of the BiggerPockets Business Podcast. If you do, we encourage you to share it with a friend or family member. Stay safe, and we’ll see you next week.

Click here to listen on Apple Podcast.

Listen to the Podcast Here

Read the Transcript Here

J:
Welcome to the BiggerPockets business podcast show number 47.

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Andrew:
This is our stark and vivid reminder that there are going to be good times and they’re going to be bad times and you can soften the blow of the bad times if you do a little planning, put away a little cash.

J:
Welcome to a real world MBA from the school of hard knocks where entrepreneurs reveal what it really takes to make it. Whether you’re already in business or you’re on your way there, this show is for you. This is BiggerPockets Business.

J:
And everybody I am J Scott, I am your co-host for the BiggerPockets Business podcast and this week I’m actually your host for the BiggerPockets Business podcast. Carol Scott has the week off but she will be back next week. This week, we have a somewhat of a special show for you. So I know a lot of us are dealing with the coronavirus, the Covid-19 crisis both personally and in our business.

J:
So we have brought on a gentleman named Andrew Sherman. He is an attorney. He’s a business school professor. He is a prolific author of 26 books on pretty much every topic related to business. And we brought him on, we recorded this show yesterday, March 16th, 2020, to talk about what is going on in both the economy and the business atmosphere. And what we can do as business owners, either current business owners or prospective business owners to kind of protect ourselves and deal with this crisis as best we can.

J:
Now, like I said, we recorded this episode yesterday, March 16th. That was right after the Federal Reserve cut interest rates to about 0%. It was right after the Federal Reserve released about $700 billion of money into the economy, what we often call quantitative easing or QE. That's where the government essentially, for lack of a better term prints a bunch of money and releases it into the economy to keep things moving along.

J:
In this episode, Andrew and I talked about a bunch of things. We talk about the outlook for the economy, both short term and long term. We talk about what we as business owners should be doing today, to help our businesses survive the current crisis over the next few weeks and months. We talk a little bit about what we can be doing today and in the near future, to better prepare our businesses in case we have a crisis like this again, and at some point, we will. So preparing our businesses and figuring out a risk mitigation plan for our business is so important.

J:
And finally, we talk about what those of us who are looking to start a business in the near future who have been thinking about starting a business thinking about maybe buying a business in the near future, what we can do to better prepare for starting or buying a business in the future.

J:
This is a great episode. Again, very timely, just recorded yesterday. I hope you find it you useful. If you want to find out more information about Andrew, about the things we talked about in this episode, please check out our show notes at biggerpockets.com/bizshow47. Again, that’s biggerpockets.com/bizshow47.

J:
Okay, now without any further ado, let’s jump into my discussion with Andrew Sherman. How are you doing today, Andrew?

Andrew:
Well, amid the chaos, I’m trying to stay calm.

J:
We really appreciate having you here. As we talked about in the introduction, you are a man of many expertise, from law to business to economics. So this is tremendous that you’re willing to be here today. We really appreciate your time. Let’s start with the fact that just last night, the Federal Reserve cut interest rates down to essentially zero. QE is officially back on the table, they’ve released $700 billion in QE into the economy between the repo markets and treasuries.

J:
What are your thoughts on how the Fed has been handling basically over the last year, all these rate cuts and essentially getting prepared for a recession before recessions had even occurred?

Andrew:
Yeah, I’m a little bit of mixed mind on this one. On the one hand, I want to see our Fed competitive with the central banks of other jurisdictions. And I know the President has been more than vocal in expressing the Fed being in alignment. At the same time, we’ve had now two unexpected emergency out of the blue Fed cuts. It’s taken the markets by surprise. The Dow as we’re speaking live is down 1800 points, Nasdaq was down as high as 2500. I think the financial markets, part of that is Coronavirus, as we’ll get into in a few minutes. Part of that is the oil upheaval in the tension between Saudi Arabia and Russia, but the markets are clearly wanting to see a bit more of a process out of the Fed, and maybe a bit more warning.

Andrew:
I think they like the productivity on the one hand, but they like the process on the other. And they’re nervous as all people are, does the Fed know something that we don’t know? Does the Federal government know something that we don’t know? Does Anthony Fauci know something that we don’t know? And so it’s all of that wondering, that leaves America’s entrepreneurs and small business owners and frankly, even big business leaders in sort of that fear of the unknown and panic mode.

J:
Yeah, there's a lot of talk recently about whether this could be what's referred to as a V-shape downturn, meaning we have a sharp downturn and then once the virus issues are resolved, and we can kind of get the economy back on track, we can get people working again, we can get businesses producing again. We potentially see a kind of a V-shape straight upwards and things are back to normal. Other people are saying that no, this could be a lot more long and drawn out. We have the risk of layoffs. People starting to default on their debt because we have consumer and corporate debt at an all time high. And then this potentially being a really long term, downturn or recession. What are your thoughts there, any ideas on where this might go?

Andrew:
So the classic analogy is a U-shape versus a V-shape. And if it’s going to be a V-shape, how sharp is the point, if it’s going to be a U-shape, how elongated is the bottom? If we look at the Dow right now, it’s actually been a W-shape, it’s bouncing up and down, like multiple Vs all compressed together. And that’s been sending a confusing message as well.

Andrew:
My sense is that it’s probably a U-shape, not a V-shape. I don’t think we’re going to get because of the nature of the Coronavirus and the way that Fauci and others have been talking about flattening the bump. We want to flatten the curve of the number of incidences, but that curve is just trying to get lower than the spike they saw in China. It’s not going to be eliminated. I don’t see though a super elongated bottom of the U. So I wouldn’t expect it to be a V-shaped spike, but I don’t think we’re looking at some 20 years of recession as Japan experienced. I think it’s gonna take a while, as we’ll discuss today for small business owners to recover from the pain they’ve already incurred and the pain that they’re about to incur if they’re not well prepared.

J:
Yeah, absolutely. And one of the things that sticks with me is I’m old enough to remember 911, and how we had pretty decent size shut down when that happened. Airlines were shut down. Tourism kind of fell off the map. People didn’t want to travel. They didn’t want to congregate in large groups. They were concerned about terrorism that lasted a few weeks, even a month or two, but it was nothing compared to what we’re seeing today in terms of businesses shutting down, city shutting down, people not leaving their homes, tourism basically cut to zero. And back in 2001, we saw GDP contract 2%, 3%, 4%. 2008, which we didn’t see any type of shutdown like we’re seeing we saw GDP contract to 8% or down 8%.

J:
Where do you presume that we’re headed in terms of GDP? Do you think this is can be one of those events? Where we literally in Q1, Q2, see -10%, -12% GDP? Or do you think the numbers aren’t going to be as bad as some are forecasting?

Andrew:
No, I think there’ll be in the single digits. I think … look, there’s a lot of businesses that have opportunity here to adjust. And look, let’s take a micro example that’s near and dear to both of our hearts as fellow Maryland Terps fans, okay? I have a client that’s a chain of sports bars. He told me the other day, that good 40% to 50% of his revenue for the year, for the year comes from March Madness. That is beyond any other sports’ event, and because of its two and a half week length, it’s almost a party every night, and particularly if the teams that you love are in it. So for him, March Madness doesn’t happen again, for 12 more months, there’s no way to recreate March Madness.

Andrew:
Now, you could … and we’ll get into this. I think in a bit. You could do creative ideas, you could do a foe March Madness, you could pretend there’s March Madness, you could run. If it’s legal in your state online, betting around it, you could do video game equivalence. You can get creative, but it’s just not the same. There’s no way for him to replace that revenue stream and sales until March Madness comes back. And so if it is a U-shaped recovery, and if you’re taking a GDP hit, some of the things that he’s counting on to replace that revenue will come back, but arguably won’t come back for 10 and a half 11 more months, at least till the regional tournaments and what is he going to do to replace those revenues or replace the loss of cash flow.

Andrew:
And so if you take that and now multiply it out by 10s of thousands of businesses, I think you’ll come to a conclusion around a single digit GDP hit, in all likelihood.

J:
Okay, so I guess that’s good news. And what from what I’m hearing is, small business owners at this point shouldn’t necessarily be thinking about shutting down going home for two weeks, four weeks, six weeks, eight weeks. Instead, they should be figuring out ways that they can pivot their business so that they can continue to generate income, even if it’s not the same income that they were previously planning on generating, but they keep things going. Is this also an opportunity for business owners to carve out new business models or to create new service offerings that either can help them now during this event, but also potentially down the road stuff? They do stuff now that they can later capitalize on when this all is over?

Andrew:
Yes. So, that's an excellent question. Let's take an industry that's been hit and will be hit very hard. The restaurant industry, retail industry. Just last night, the mayor of both LA and New York shut down restaurants, clubs, cinemas, unless it was carry out or delivery. So let's take your example. Let's say I'm a restaurant that really hasn't done much carry out or delivery, I obviously have to shift my business model if I want to stay open to carry out delivery. But the problem is, and this is the main message I want your listeners today to absorb and think about, and I pray that they are better prepared for next time. If you're a restaurant that's been doing takeout and delivery for years, it's no big shift in your model to ramp that up. You've got the database, you have the customer expectation, you have the loyalty, you have the delivery systems.

Andrew:
But imagine that you’re a New York restaurant that just got the proclamation from the mayor last night and you’ve never done takeout or delivery. It’s a little late out of the game to suddenly try and reach your customers and get them thinking that way to get the delivery systems right, the packaging right everyone needs new packaging now because they’re concerned about coronavirus.

Andrew:
So I think the businesses that were already engaged in alternative business models that lend themselves to a crisis have five, 10, even 15 steps ahead of the businesses that are coming unprepared. And really that I hope if there’s one silver lining inside this coronavirus scare, it’s that we are all, all of us, personally, professionally, business-wise, more prepared for the next crisis than we were for this one. because I have to tell you, at so many levels from our federal, state and local governments, to businesses and entrepreneurs to big business, we were about as unprepared for this as I’ve ever seen.

Andrew:
And like you I’ve been through 911, I’ve been through the 80s meltdown, I’ve been through ’08, ’09, there have been a lot of spikes and declines in our economics but this one has both a health scare too, and an economic scare. And while I commend our emergency responders and our governments for trying to play catch up, we’re playing catch up. And it’s obvious to our citizenry, and it’s obvious to the rest of the world that the greatest country on earth is scrambling to play catch up in response to this virus. And I think that … I really do hope that we’ll be much, much better prepared in the future.

J:
So let’s talk about that risk management that planning for a downturn, preparing for unanticipated events. I come from a corporate background, and I talk a lot about doing risk management, about doing risk planning, about thinking about what your worst case scenarios are and having mitigation plans in place for them. But something like this is such a black swan. And when I say black swan, I just mean a once in a lifetime, once in 100-year, once in a really long period event that’s very difficult to plan for. Are you suggesting that even small business owners should be planning for events like this and to what degree should we be spending our time planning for unanticipated risks versus spending time building our businesses and taking advantage of things when they’re good?

Andrew:
Well, it’s a very astute question. And look, you can’t spend all of your time particularly during booming economic times, planning for the worst. Most entrepreneurs aren’t even … their DNA wiring is not the type of mindsets that when things are going well. It’s hard for them to even think about bad stuff happening or bad stuff happening as suddenly as coronavirus has affected so many companies.

Andrew:
So you’re right but what we also have … I was interviewed by CNBC on this last week and the week before, ironically I had been interviewed not on the coronavirus, lack of planning but a different interview on lack of succession and transition planning among our America’s small business in aging baby boomer population, and that I identified is just as big of a crisis. And then of course, we had a real crisis to layer on top of that.

Andrew:
So I think it’s, it’s getting in a mindset … I called it Ponce de Leon syndrome, thinking that we’re going to live forever, thinking that there will be no more black swans. I do think that small business owners, entrepreneurs, big businesses, they owe it to their ecosystem, to their employees, to their customers, to their supply chains, to their district distribution partners, to be thinking about the worst to assume that things like this may happen again.

Andrew:
There is already starting to be some science that something at the level of coronavirus may not be a black swan per se, it might be more of a gray Swan, something that could occur every five years or 10 years, and we’re going to have to adjust to the new normal.

Andrew:
Some businesses were more prepared for telecommuting and telework than others. Some industries lend themselves much better. I myself, I’m just getting up to speed on zoom to be with you today and to teach my online courses at Georgetown Law School for the rest of the semester. I admit myself to not being as ready as I could be. But I’ll spend a good part of my evening and tomorrow morning, moving from Zoom novice, to Zoom expert, because tomorrow afternoon, I have 65 students waiting for me deliver a lecture and I don’t want to let them down. So I think there’s just a lot of little things that we can do to be more ready.

J:
That’s great. And I want to talk a whole lot more about the telecommuting and the working from home and the shift that we are potentially going to see based on what’s happening today. Before I do that, you mentioned earlier a responsibility to employees, a responsibility to vendors. A big question that I’m getting asked a lot these days by small business owners is, how do you draw that balance between trying to take care of all of your employees versus taking care of your business. I’ve had several business owners ask me flat out, should I be considering layoffs or should I be kind of layering or flattening things out so that the business is potentially making less money, but I’m still keeping people on even if I have to cut their hours, even if I have to cut their wages? What’s the strategic thinking there for small business owners in terms of how they address laying people off versus just kind of cutting everybody’s hours and kind of spreading the pain around, if that makes sense?

Andrew:
Yeah, it makes a lot of sense. So think of it as three buckets. Bucket number one is when Ted Leonsis warms the capitals and the wizards or Mark Cuban who owns the Mavericks steps up and says while the stadiums are shut down, I will be paying the salaries of all of the stadium workers and the people that lay the floor and change it from a basketball to an ice hockey Stadium. And the hundreds of people that beyond their control are basically out of work until the season’s start or the wonderful gestures by athletes over the weekend to cover some of those salaries, which makes you wonder how come the owners were not?

Andrew:
Anyway, that's bucket one, that is just this amazing goodwill gesture by business owners that says, "Don't worry, I've got your back." But these are also people of very significant means. And they can afford to run a month or a month and a half of payroll. And yes, it's painful. And yes, it's completely altruistic on their part, and it's a wonderful thing to do, but very few businesses can really afford to offer that benefit.

Andrew:
Yesterday, I was on the call with a much smaller company, company down the southeast that may need to look at layoffs is wondering how to handle the reduced cash flow. They’re looking at creative strategies like three-day work weeks or four-day work weeks or partial pay, partial days, rotating, they’re looking at almost every mathematical equation, so that some income will be coming in to their employees.

Andrew:
The third bucket is of course the role of the federal state and local government. You already saw some announcements last Friday legislation being passed by the House. Hopefully the Senate will sign off the president promises that he will sign as providing relief to certain types of hospitality, retail travel businesses. And look, no matter what your politics, you don’t want to rely on the Federal government to be the ultimate answer to everything. Otherwise, we’re looking at very significant spikes and taxes for all of us. And we also were never set up to be a society that relies on the Federal government to bail out everybody and everyone every time something like this happens.

Andrew:
So it’s a delicate policy balance between how much can business owners foot the bill, how can small business owners where layoffs are going to be inevitable, do right by their employees and also do right by their customers. And then the third bucket is how much do you want to get relief for these layoffs. And this goes back to your V versus U-shape, if it’s a V-shape a shortened U-shape. Government can withstand that, and not go out of business. And the government can help as small businesses. If this U-shape gets elongated, or Fauci and his team are unable to suppress the curve of coronavirus cases, we really could see pressures on resources together with back to what you said double digit negative GDP growth. Which could take us a lot longer to dig out of especially at a time where we have an election coming up this fall potential change in policy and administration and leadership, which is going to be disruptive no matter what.

J:
Yeah, and you mentioned something there in your three buckets. In the third bucket, you talked about government and how long term reliance on the government isn't good for anybody. But in a major crisis like this, basically, we've gotten to the point where the Fed is to a large extent … to quote the cliche out of [ammo 00:20:55]. Interest rates are basically zero, we could print a lot more money but then we run the risk of inflation.

J:
So we may be out of fiscal policy options to really kind of stem what’s going on. The next obvious move is kind of legislation through Congress where basically we figure out how to provide subsidy or benefit directly to business owners, directly to consumers. Do you have any thoughts on where that might be headed what the government might be thinking about doing or might do in the coming months to kind of help the economy along now that the Fed is pretty much out of ammunition?

Andrew:
Yeah, I think we over focus on the Fed sometimes. Somebody said the other day, even with interest rates down to essentially a quarter of one point, if someone fears catching coronavirus, they’re not going out on Saturday to buy a new car just because there’s an interest rate is a quarter point less. Or if their current car is working fine, or if they’re not driving their car at all for the next 30 days. The urgency to buy the car may not be there. Now maybe that consumer will come back in the fall and buy that car. So will that interest rate really make a marginal measurable difference in their life compared to the difference between fiscal and monetary policy?

Andrew:
I don't know that the Fed, like you said, has too many more weapons available to it, compared to using SBA loan programs, emergency training, loans of hardware to allow more people to work at home if companies don't have the hardware that they need. There's a lot of other tools in the toolkit that are available in more in a non Fed policy perspective, because the press likes over focus on the Fed, the administration over focuses on the Fed.

Andrew:
And frankly, last night, the Fed did, what the White House asked it to do, and the markets have been anything but reassured by that move. I mean, they continue to be down very heavily as we speak.

J:
Yeah. So one of the things that’s interesting in this particular downtime when we talk about risk management and contingency planning. But one of the things that we tend to think about when we think about economic risks, is we think about that demand side slowdown. We think about people are losing their jobs, unemployment is going up, people stop spending. Therefore, businesses obviously are slowing down not making as much money. But in this case, we actually have something on the other side, we have a supply side constraint as well. We have China that can’t necessarily manufacture the materials that we need for our business. We aren’t necessarily getting either the raw materials or the finished materials we need to stock our shelves. Do you see the supply side issues and the supply side constraints that we’re seeing today to be a long term issue in this next whatever is to come in the economy? Or do you think that’s something that’s going to resolve itself fairly quickly?

Andrew:
I think it’ll resolve itself fairly quickly. There are definitely some supply chain issues that concerned me relative to access to prescription. Medicines that might be made in China, but frankly, I’d be looking right now at supply chain issues out of Europe, China seems to be already slightly on the path to recovery. People are back into manufacturing plants, I think that will continue. They seem to be … emphasize the word seem, on the other side of Fauci curve. Whereas Italy, Spain, if you had things that you were relying on coming out of Europe, that’s smack in the middle of that bell curve. I’m not sure that that’s going to happen anytime soon.

Andrew:
But we do seem to have more than adequate supply of everything. This morning was in a CVS and they basically were fully stocked other than of course, hand sanitizer, they even had toilet paper, just in case, anyone’s still short on that. But it’s just odd. I was in the supermarket on Sunday. And again, beautiful produce and fresh foods and all kinds of things and then you get to the toilet paper isle it was empty, and I thought, geez, there’s just a human cycle problem. Here there’s lots of food and no toilet paper, I do think that the supply chain should be monitored carefully.

Andrew:
Now, I’ll give you a different example of a client of mine out on the west coast. They are feeling very flush right now, because they do get a lot of their inventory from China. They said that their current inventory levels are higher than the norm. And that is a benefit as they sell through that inventory. Of course, it could be a liability if consumer demand drops. A lot of the products that they sell aren’t really things you have to have. They’re kind of things that you might like to have, entertain yourself. Although, I guess if we’re all stuck at home for weeks at a time, maybe that demand will go up.

Andrew:
Now, what they weren’t sure is when they sell through that inventory, how quickly they’ll be able to replace it. So it was definitely a supply chain moving target, and he’s doing his best to manage it and he’s hoping that you know, as his inventory level goes down the China supply chain improves. But all joking aside, if you were counting on key supplies for your business from Italy, from Spain from any parts of Europe right now, I think you’re in for a while before you see a container coming through.

J:
Yeah, absolutely. Before we move on to the next part of our show, let’s hear from one of our show sponsors.

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J:
So one of the things I’ve noticed in my old age, and I’m getting there, so I’ve been through a couple of these, and one of the things I’ve noticed is that we have an event like the tech bubble, like 911, like 2008. And we look back five, 10, 20 years afterwards. And we realize that the world has sort of changed based on that event in ways that were, for the most part, unpredictable when it originally happened. And just as an example, we see everybody starting to work from home today. So reasonable prediction, that maybe in five or 10 or 20 years, we see this shift from people coming into the office to do jobs that could otherwise be done at home, to more people starting to work at home and seeing a shift in that direction. What types of shifts do you potentially see resulting in the next five, 10, 20 years based on this particular event?

Andrew:
Well, I’ve got a couple of different answers for you there. If you look at social media, there are some pretty funny posts about our ability to have advanced quantum computers and send people to the moon and into space. And we’re just now getting around to the fact that we should be washing our hands regularly. So when you hear a White House press conference, and the smartest people in our entire planet are telling us the main things not to do is to not wash your hands and to use hand sanitizer if you can find it, I don’t know that that’s a behavioral change that is significant.

Andrew:
Then there’s another segment of the population that’s looking at the politicians and looking at the media and going, “Yeah, this is another Y2K.” You remember Y2K, our entire ecosystem, our technology, everything was going to blow up, who is going to reset we’re all going to be without the internet. And then the next morning was like really that was a lot of smoke about nothing.

Andrew:
I think you’ve got this rugged individualism and skepticism that one of the things that Fauci trying to communicate or an over communicate over the weekend was, this really really is serious. This is not Y2K, this is not a hoax, but people are still probably taking it with a grain of salt and how much this will change their behavior. I walked by both very crowded and uncrowded restaurants on my way in this morning, so it seems that it is affecting short term behavior. We are social beings, we don’t like being away from each other for a particularly long time. And I don’t see this significantly changing consumer behavior.

Andrew:
I do think that there will be little things if we live in the city, we have limited storage, might we look at having a little bit more storage for next time around. Things like that will change consumer behaviors. But I don’t think it’s going to change it too significantly other than hopefully we’ll all be a little more hygiene conscious.

J:
How about on the supply side? Do you see currently much of our trade and not over, I think it’s like 4% of total trade is coming out of China. But we rely on China for a lot of things that if something like this happens, puts our country at risk, do you see those supply chains changing? Do you see additional redundancy being put in place by some businesses? Do you see trade moving from China to other parts of the world? Perhaps Mexico, for example, where do you think that … what impact do you think this is going to have on trade and supply chain and our relationship with China?

Andrew:
Yeah, if I were Mexico right now, I would be heavily promoting economic development access to manufacturing resources. The proximity of Mexico, we’ve taken steps to kind of shore up the border and we were working on better immigration policies. I would be definitely promoting myself as a potential manufacturing resource, but the US has been dependent for some time on overseas manufacturing outsourcing and whether that will shift just because of coronavirus, I don’t know. I think that maybe it’s the convergence of the trade wars and the coronavirus. And there being accusations that perhaps China has not made full disclosure with us as to how this all got started.

Andrew:
It’s going to be an aggregate of variables because what you’re talking about and look, it’s a it’s a fantastic question. You may be right, but you’re talking about, hundreds of millions of dollars and billions of dollars of infrastructure being built, and bringing our economy even with smart manufacturing and robotics, you’d be shifting our economy back to something that it was 50 years ago, instead of what it’s become, which is a much more information and services-based economy.

Andrew:
The problem is personal services, which … I mean who’s really not canceling their appointment for their personal trainer or going to a gym right now, there are large chunks of our economy that have become dependent on human interaction and people going outside and people traveling to places even if they’re traveling by Uber or Lyft instead of in their own vehicles. And that’s all being affected right now.

Andrew:
I’m looking out my window looking down F Street, usually a very busy street around lunchtime, and I see one person, one person.

J:
Yeah. Okay, let’s do a quick shift from all the negative and the mitigation and the risk to opportunity. So there are a lot of people in our audience that either are getting ready to start a business or have thought about starting a business, now is probably for a lot of reasons, not the best time to be starting a business. But if you do things intelligently, if you focus on recession resistant opportunities, maybe now is a good time to start putting those plans in place or maybe even launch something.

J:
So for those people out there that are considering launching a business in the near future, what should they be thinking about? How can they take advantage of what we’re likely to see in the economy, in the world over the next several months or years?

Andrew:
Well, it’s a fantastic question. So first of all, let’s define timetables, if you just start thinking about starting a business, I hope and pray that by the time you get your business plan written, and you do your test markets of products and services that we’re well past this. Because even if somebody very diligently started planning their business in the spring, it’s not likely to launch until fall. And I think everyone hopes that by the fall, we’ll at least be on the other end of that Fauci curve that’s being described. Now, if you’ve been planning a business, and you were literally like going to launch this week, and it was going to be retail nail salon. You may want to delay your grand opening. I don’t know that anybody should be rushing out for manicure or pedicure in this environment, I’ve canceled my own pedicures on a permanent basis now.

Andrew:
But that it just depends in part, like you said on the type of business, the timetable the business, is it retail versus non retail. For example, if you were going to be doing a remote technology training business that included zoom, you probably have thousands of potential customers that are ready to go tomorrow. And if you weren’t going to launch that business until the fall, quite frankly, you may want to think about launching it now. So the demand curves are going to be choppy, depending on the nature of the business.

Andrew:
The other thing you’re going to see is remember that at any given time in our country, there’s a million or two potential entrepreneurs who are thinking about starting a business but then something in their life happens where they have no choice, you will have people losing their jobs. We are going to see a spike in our unemployment rate and our underemployment rate. And many of those people will turn to entrepreneurship and small business. They’re going to say, “Hey, I’m done being an employee, I’m going to be a business owner.” And so I do think that they always say that during a horrible crisis or economic downturn, we see more entrepreneurs born and more babies born. Because people have more time to business plan and they have more time to spend in the bedroom.

Andrew:
So I think we will see an uptick in babies and we will see an uptick in businesses born as well.

J:
Well, there you go there’s-

Andrew:
And probably puppy adoptions, who knows?

J:
Okay, there are some good opportunities there. So a topic that I know that you’ve written and talked about a whole lot is business financing. For those of us in our audience who didn’t necessarily live through 2008 and didn’t try and finance a business or generate some liquidity for their business back then, what should we be expecting to see assuming that there’s a downturn? Assuming that we head into recession, assuming that banks start tightening up their lending, what should we be expecting in terms of financing for businesses either new businesses or existing businesses, maintaining liquidity? And what should we be doing right now to prepare for any shifts in the financing market for our businesses?

Andrew:
So this is hitting at a very interesting time. The treasury cash buildups of the Fortune 100, or at the highest levels in the history of mankind. Companies like Apple, were sitting on some ridiculous number, 400 billion in cash, Google 300 billion in cash. I’ve never seen treasury so stocked with cash, as big tech companies and other large companies had.

Andrew:
Small companies on the other hand, were operating with very little cash reserves. And so I don’t want to sound too egalitarian here, but if I were a small company, and I was running into a real cash flow issue, I would be trying to think of something. Anything that I could tap into cash that is being held by the larger companies. Is there some product or service I can sell them? Is there something I can be prepaid for? Is there something I can get a deposit for because we don’t have a shortage of cash. We have a shortage of distribution of cash.

Andrew:
And this is a great point that was made over the weekend. The biggest difference between 2008 and today, is our banks are strong. Our banks are strong in response to the legislation that was passed into Dodd-Frank.

Andrew:
And so this is happening at a time when banks do have money to lend. Now I do agree with you, they’re not just going to give it away and create another 2008 repeat for 2021, ’22. But we are flush with cash banks have cash. Large companies have cash. A lot of mid-sized companies have cash. And we’re just at a point where how do we get some of that cash redistributed in a capitalistic entrepreneurial way to small businesses that might not have cash reserves.

Andrew:
It is not a great time to be raising equity capital, a lot of equity capital, venture capital angel investors are all on the sidelines. Imagine going to an angel club and pitching to 20 angels who have watched their net worth go up and down by 10% and 20%, just in the last two weeks. If I were an angel, I don't even know if I'd be going to the dinner until the capital markets stabilize because that's where my wealth probably it resides right now.

Andrew:
So venture capital private equity, the problem is, private equity smells blood in the water. And so while they might be willing to deploy cash, they know that smaller businesses may be desperate for cash, and of course, the cost of capital and the terms that go with that capital may not be anything that’s going to get your lawyer or accountants excited.

J:
Yeah, that’s a fantastic answer. And as a small angel investor myself, I’ve definitely felt that and have, for the most part written off a few of my investments in the short term, so definitely get that. How about those people out there that are considering buying a business. So I’m sure there are business owners right now who have been struggling and may see this as an opportunity to exit, maybe they’re getting older and see this as an opportunity to retire. Might this be a great time to be able to pick up a business really cheap, that might not necessarily cash flow or thrive for the next year or two because of this downturn, but you have an opportunity to pick up something cheap and start to build up so that as we hit the next expansion, or we recover, there’s an opportunity.

Andrew:
100%. My next call after this podcast is with a gentleman. He’s an established restaurant entrepreneur, he’s in the process of trying to raise acquisition capital to buy some of the what will soon be troubled restaurant chains that are out there. He’s got a grit and determinism and vision that is awfully strong right now. And it’s always been in our history, that if you are willing to take the risk of buying assets that are the most troubled … If I unlimited cash right now, I might buy a cruise line company, I might buy an airline. Cruises is an interesting example. With aging baby boomers, the amount of wealth that’s been built up and the wealth that will be restored. The 20-year forecast for the average cruise line has got to be through the roof in terms of what they anticipate demand to be. But right now, of course, I think you’d have to be a little bit crazy to go on a cruise. And so you say is that a short term, medium term, long term problem.

Andrew:
When you do M&A and acquisitions, you’re definitely buying for the medium to long term, you’re not buying for the short term. And you might be able to catch a business owner off guard, who due to a health issue or a family issue, or just general fear is willing to sell at a much lower price than they would have even three weeks ago or three months ago.

J:
Yeah. And the addendum to that is that there are a lot of business owners out there that are worried about how they're going to make their next mortgage payment or how they're going to make their next car payment, and may be willing to sell on some type of seller financing, basically you're providing them essentially an annuity, you're telling them I'm going to pay you every month for the next year, two years, three years to get you through it in return for you, essentially handing me over the assets of your business. So there could be an opportunity or a number of opportunities for small business owners to kind of buy a business-

Andrew:
Two things. In every M&A deal, merger and acquisition deal, there’s price and there’s terms and price and valuation is one thing, but the terms that you pay, and the terms that some people might be willing to accept, for the very reasons that you just said, is 100% spot on. The second thing and I’ve talked about this on other podcasts and interviews with the major media sources is, look, we’re having a natural aging of the baby boomers already happening right now. Where 10s of thousands of business owners need and want to sell their businesses over the next three to five years.

Andrew:
And sometimes it takes a shock like this that says, “Okay, you know what I’m done. I’ve had enough, I could go another three to five years. But, I’ve been through enough business scares, I’m ready to sell.” And so I do think that it’s an opportunistic time, if you’ve been sitting on cash to explore the business market. And then the third component, which we talked about earlier, is you have all of those people that might lose their jobs, have a decent amount of 401k and savings.

Andrew:
If you believe the markets will stabilize, and your 401k account will eventually stabilize, you might want to buy a small business in lieu of going back to work or starting to look for a job, if you’ve got the savings and then that business could eventually be passed on to your next generation.

J:
Andrew, this has been absolutely fantastic. And I’m sure my listeners very much appreciate your insights to hear your reassurance that this isn’t the end of the world. I would love to give you the opportunity to leave us with any final thoughts you have for … as business owners, as prospective business owners what we should be doing, we should be thinking. And then please tell us where we can find out more about you, where we can pick up any of your … I think it’s 26 books, or hear more about what you have to think on the topic.

Andrew:
Well, thank you. Thank you for that wonderful feedback. Thank you for the invitation to give a final comment. And thank you for a 30-second commercial at the end, which I promised will be under 30 seconds. So one, you are a fantastic host, and it’s been my pleasure to be on the show. And we got this all pulled together on very short notice, so I hope your listeners enjoy it.

Andrew:
Number two, I think my final thought goes back to the conversation we had about halfway through this podcast and that is, look, it is a natural feeling that when the economy is booming and unemployment is low and demand is high, to just have fun. I mean, how fun was it last year to be a business owner with some My clients having 40%,50%, 60% growth, 20% spikes in profitability, brand new cars, great vacations. It’s fun when things are going that well. And it’s very hard to pull yourself out of that party and say, “Oh my God, four months from now we could have one of the greatest world health crisis has ever, am I ready for that?”

Andrew:
But this is our stark and vivid reminder that there are going to be good times and they’re going to be bad times and you can soften the blow of the bad times if you do a little planning, put away a little cash. Imagine small business owners that had a great 2019 that puts some of those retained earnings away into an emergency account, instead of buying his and hers matching Maseratis. How smart do they look right now to weather this storm, and to get through it.

Andrew:
We’ve just got to have discipline, and there’s a great new TV ad right in right now for Volkswagen where the guy from Billions, it plays an accountant to rich people and his client is some famous celebrity and he’s traveling all over the world and spent all kinds of money. And he says, but I just bought a Volkswagen and the CPA is so relieved that he’s finally trying to save some money somewhere.

Andrew:
And that’s what this is like. I hope every one of your listeners thrives and as great business years, but during those years, putting something away for the emergency is important. So that would be my parting thought. I think that’s so important.

Andrew:
As far as getting a hold of me, it’s pretty easy. Google knows how to find me. All the books and the speeches and the podcasts and everything are readily available. Our website here at the law firm is www.seyfarth. That’s, S-E-Y-F-A-R-T-H.com. All my contact information is on there. And you were kind enough to mention my books the Amazon author page for Andrew J. Sherman has all the books on there. And look, if you’re going to be at home for the next few weeks. What better time to order a couple of books on Amazon and get yourself up to speed on things.

Andrew:
If we are all quarantined at home for a couple of weeks, there’s a part of me that’s going to be very, very frustrated and very concerned about my clients and everything else. There’s a small part of me is going to be relieved. I don’t know that I’ve been home for two weeks, in 33 years, I played Gin with my wife the other night. We’ve been married 35 years. I don’t think we’ve ever played Gin or not since the first year of marriage.

Andrew:
There’s some things that we can all do … I saw a young man who must have been off work because it was already 9:30, quarter to 10, he was racing his daughter up and down our street on her bike, and he was running and so he was getting his wind sprints in and spending time with his three-year-old daughter who looks like she just learned to ride a bike. Let’s take advantage of this time, because when the economy comes roaring back, and it will, we’re gonna wish for these two weeks or three weeks back, so that would be probably my final, final parting thoughts.

J:
Andrew, thank you so much for all of our listeners, go check out our show notes. All the links that Andrew mentioned will be in the show notes, including links to his books, links to his attorney website, seyfarth.com and links to a whole bunch of other things. Andrew again, we really appreciate this. And honestly, I would love to have you back when kind of we’re out of emergency mode. And we can talk about something a little bit more mundane in the business world and maybe less exciting but still super important to our listeners.

Andrew:
I would love to do a part two, we can do a whole analysis on next year’s Maryland Terps season if you like.

J:
I’m looking forward to that. Andrew, thank you so much,

Andrew:
Well, take care.

J:
You as well. Have a great day. Stay safe.

Andrew:
You too.

J:
Everybody. Thank you so much for tuning in this week. That episode hopefully was enlightening, hopefully provided some ideas for those of us who are navigating this crisis through their business or looking to be starting a business in the future. Everybody for both myself, for Carol Scott for everybody at BiggerPockets, we wish you a very happy and a very healthy next week. Stay safe, and we will be back next week. Thank you again so much for tuning in.

Watch the Podcast Here

 

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In This Episode We Cover:

  • Where the economy might head next
  • Potential government interventions
  • How Andrew’s clients are grappling with cash flow problems
  • Creative solutions in times of low customer demand
  • Where to turn for financing during an economic downturn
  • Which companies and industries have the most cash to deploy today
  • Creating an emergency fund to prepare for “black swan” events
  • Why this event is likely to create many entrepreneurs
  • And SO much more!

Links from the Show

Books Mentioned in this Show

Tweetable Topics:

  • “When things are going well, it’s difficult to consider bad stuff happening.” (Tweet This!)
  • “We don’t have a shortage of cash; we have a shortage of distribution of cash.” (Tweet This!)

Connect with Andrew

What does it take to start, scale, and sell your own business? Every Tuesday, J and Carol Scott ask this question to entrepreneurs of all stripes and delve into stories that go beyond the launch. F...
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    Barry H. Investor from Scottsdale, AZ
    Replied 5 months ago
    Wonderful podcast. Andrew is engaging and knowledgeable. I would be interested to hear his thoughts on what the U-shaped recovery might look like for residential real estate on a regional and national basis. Thanks for this presentation. :-)
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 5 months ago
    Perfect timing, great podcast!