Practical Advice for Business Owners During COVID-19
As we are now knee-deep in the COVID-19 Pandemic crisis, we are getting many calls from business owners with the same story: I am now closed for business as required by law; my employees have all filed for unemployment and I do not know if they will want to or be able to return to work; since no money is coming into the business, I cannot pay my rent or other bills like utilities; I cannot pay my business loan; and it is unlikely that I can fulfill my contractual obligations for existing contracts or it is not likely that others will be able to fulfill their contractual obligations to me. I have worked so hard to build this business and now I may lose it all. What do I do??? These concerns ring true for businesses regardless of size, type or location.
If any of the above concerns ring true, here is some practical advice.
Secure the Health and Safety of Employees
First and foremost, secure the health and safety of yourself and your staff. If your business is non-essential and is required by Executive Order to close, then close. Do not try to circumvent the law and put any staff or customers at risk. This kind of action is nothing short of a liability. If you are an essential business and are clearly allowed to operate, carefully review and strictly adhere to all CDC and other guidelines for your business operations. Do NOT cut corners, take shortcuts or shirk your responsibility to your staff or customers as doing so invites liabilities in the future. If you are not able to fully and properly comply with legal requirements of staying in business, act cautiously and simply close. The risk of operating without full compliance is not one to be taken and is more severe than temporarily ceasing operations. If you are not sure if you fall within the essential business category in your jurisdiction, you can seek designation from the operative governmental agency which can give you clarity and comfort of knowing what you can or cannot legally do. This designation request can be done with the assistance of an attorney or on your own.
Do right by your employees. In addition to taking care of the health and safety of your employees, ensure that you maintain an open line of communication with your staff regarding the future of the business and their positions. Carefully review your staffing needs and discuss the needs of your employees. Do not give your employees any false sense of hope of getting their jobs back or full salaries but you should be honest about your expectations for the prospects of the business in the short term future. There are a variety of labor laws and unemployment insurance guidelines that have been enacted in response to this crisis that both employees and employers should be aware of, including health and safety (https://www.cdc.gov/coronavirus/2019-ncov/community/guidance-business-response.html), unemployment insurance (https://labor.ny.gov/ui/coronavirus-faq.shtm) and labor laws (https://www.dol.gov/coronavirus/unemployment-insurance) in general.
Rent and Other Business Expenses
Even for businesses that are operational and compliant with health and safety requirements, it is likely that their revenue has been significantly cut and is not nearly enough to keep up with all business expenses. Typically rent is the next biggest expense in addition to payroll. It is no secret to landlords across the globe that if a business is not operational or is marginally operational, making rent payments is simply not possible. The first order of business is for the business owner to make a strategic decision about plans for the future. Do you want to stay in the space? If so, can you afford the current rent? Do you want to give up the space? Perhaps you were thinking about leaving the space anyway or your lease is almost up and you were not going to renew it or you planned to relocate. Once you have a sense of your own plans, it is time to find the actual lease and review its terms. Some leases have an exit clause while others renew automatically. You want to carefully review any guaranty to see if there is a good guy clause or other relevant details. If you choose to try to terminate the lease, leases typically have very particular notice and timing requirements that should be strictly adhered to.
We encourage businesses to approach landlords to establish open lines of communications and discuss mutually beneficial solutions. For example, some landlords may allow a tenant to forgo paying rent while the business is closed and then make up the arrears without penalty upon resuming of operations. Other landlords are amenable to a termination of the lease in which case the negotiation of a surrender agreement may be a favorable solution. There are of course situations where a landlord takes a hard position of demanding that rent be paid on time and in full or else will threaten default. In this case, the tenant will have to make a strategic decision including an analysis of the risks of simply breaking the lease or failing to pay. In other situations, tenants are able to take this opportunity to renegotiate a lease and add or modify terms that do not suit them. Every situation is different and requires a preliminary careful analysis of the lease and underlying circumstances. A thorough understanding of your contractual lease obligations will give you the tools to make the best decisions going forward. We suggest arming yourself with a knowledgeable and aggressive attorney no matter which direction you ultimately choose.
With respect to utility payments and other day to day expenses, we suggest that business owners make a preliminary list of these obligations. Certain utility companies may be giving customers a temporary reprieve or waiving late fees and penalties. Perhaps there are some utilities that you can temporarily cut such as cell phone plans for employees, water or coffee service, cleaning supplies and the like. We encourage business owners to call these vendors to ask for concessions and determine whether the position of these vendors or service companies with regard to continuing obligations while simultaneously cutting these expenses where possible.
Loan and Debt Obligations
Businesses are also concerned about their loan obligations. Whether you have an acquisition loan that you took when you purchased or acquired your business or a working capital loan, suddenly the loan payments may have become impossible to service without business revenue. Once again, the first step is to pull out the loan documents, including any personal guaranties and/or security agreements, and understand the underlying terms of the loan. It is also important to understand who the lender is as SBA loans may have special reprieves as a result of recent laws passed in response to the pandemic. Other lenders may institute programs to help struggling businesses. Once you understand the terms and nature of the loan, in light of these unprecedented circumstances, we are encouraging business borrowers to approach lenders with requests for loan modifications and/or renegotiation. While there is not enough history just yet to predict exact outcomes, we do know that lenders have been amenable to modifications and restructuring under difficult circumstances in the past. We also believe that the United States government will encourage and possibly support loan modifications and restructuring of business debt large and small. A knowledgeable attorney by your side can help guide you through this review and intricate restructuring, negotiation process.
Pending Contract Obligations
Business owners have also expressed concerns about being on both ends of pending contracts. This can be a supply contract, a purchase contract or anything in between. You may be owed money for past services or goods sold or you may owe money. In any case, the first step should be to review the underlying contract to determine if there are force majeure clauses, default provisions or termination clauses. Once again, due to the unprecedented nature of this pandemic, we do not have history to know how courts will handle contractual disputes or what rights parties can avail themselves of. However, as with everything, we encourage businesses to immediately contact the other party and open the lines of communications. If you are owed money from your customers, find out whether the customers are operational and whether you can work out a payment arrangement. Consider the customer’s prospects of continuing to stay operational and determine whether you need to provide for security such as recording a lien. If you owe money, consider entering into a realistic payment arrangement of your own without default interest or penalty fees. Good faith negotiations are a must in this environment and may later serve to show a party’s cooperation and fair dealing in the event that a dispute results in litigation.
Keep very accurate records of payments received or sent, goods sent or received and all communications between the parties. Maintain these records in hard copy if possible as well as accessible electronic format. Send formal written notices to the relevant parties in compliance with the required notice provisions in the contract, i.e. some contracts require notices to be sent via certified mail and email. Some of our clients tell us that they are exchanging text messages with other parties as a means of negotiations. While this is acceptable as a means of communication exchanges, it is imperative that any final deals be memorialized with a formal writing signed by all parties such as an amendment, rider or contract modification. We believe that emails and other writings should be carefully crafted as they can be subject to scrutiny if a lawsuit should ensue. Therefore, consider engaging an attorney early in the process if you become embroiled in any contractual dispute.
Securing Your Personal Assets
Prior to taking any major steps with regard to your debt obligations, we strongly advise business owners to immediately take asset protection measures to safeguard their personal assets such their real estate holdings, individual bank accounts and other such personal assets. The process of asset protection goes hand in hand with estate planning measures, including health care directives, beneficiary designations, naming guardians of minors and life insurance. It is critical that these measures be taken BEFORE any credit issues or problems affecting your personal financial situation arise, i.e. if you personally guaranteed a loan in which you may default, you should secure your personal assets as a priority measure.
We Can Help – Contact Us
We understand that this is a difficult and turbulent time for you personally and professionally. You should engage a knowledgeable and competent attorney to guide you as your strategic partner to assist you as you work through your business issues.
The attorneys at Beress & Zalkind PLLC are providing safe remote consultations to meet client needs. Feel free to call us at 718 513 3588 or send an email to firstname.lastname@example.org.