Cash is King: The Small Business Fire Sale is Coming

Fifty percent of American small businesses can’t afford to operate their businesses for more than three months amidst the current COVID-19 crisis, according to Goldman Sachs.

As a result of mass lay-offs and hiring freezes, unemployment in the States is expected to reach twenty percent, which is not too far off the 25% unemployment recorded during The Great Depression.

It’s a tough time for the overwhelming majority of businesses, but as I wrote in Winners, Losers and New Business Opportunities, there are companies that are directly benefiting from the crisis (distance education, food delivery and office furniture manufacturers and retailers to name just three — at least, in the short term).

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Cash is King

Given that we’re on the precipice of mass bankruptcies, organisations that fall into one of the following buckets stand to benefit big-time from the coming fire-sale.

Cashflow positive
Closed a significant funding round just before the crisis hit
Have more than 24 months of runway
Are otherwise flush with significant capital reserves

Struggling companies will be doing whatever they can to stay afloat — from layoffs, hiring freezes and pay-cuts, to cutting back spending on non-essential items, and taking advantage of Government and lender concessions and grants (see 23 survival steps here).

Some will get desperate and start selling off assets in a bid to extend their runway.

Others might do so as part of formal liquidation procedures in order to salvage as much as they can and pay off creditors before they officially call time on their companies.

Unless a miracle occurs — COVID19 disappears tomorrow, the economy re-opens next week, millions get their jobs back, and business as usual resumes as if we didn’t just spend the last few months practicing social distancing and watching the stockmarket nosedive — then this presents a massive opportunity for companies that are flush with cash.

In addition, companies that are flush with cash and have sound fundamentals might also be able to tap into interest-free, or incredibly low interest-rate loans, to fund the acquisitions with a combination of cash and debt.

Opportunities for Companies Flush with Cash

Over the next few months, companies with a little extra cheddar should monitor the market for the following opportunities:

Buying distressed companies at a significant discount (competitors, complementary companies or unrelated companies to diversify)

For example, marketing wunderkind Neil Patel purchased online marketing blog Kissmetrics for $500,000 despite the fact that it did not generate any revenue. He did this because, at its peak, Kissmetrics was generating over one million unique visits per month — this was a very specific audience of people looking to up-skill their marketing game. This was an audience that Patel could, and has, monetised.

Buying distressed assets and intellectual property at a significant discount (websites and URLs for the web traffic, CRM lists, software, systems, content etc).
Hiring gun employees who are either out of a job, standing on very shaky ground or are now in an unfulfilling role where spending has been frozen, potentially for less than they would command in a normal market.
Investing in diversified and discounted securities, income or capital gain producing assets (equities, commodities, property etc).

While what I’m proposing might scream opportunistic scavenger benefiting from the misfortune of others, the reality is that a service and value is being provided.

First, monetary value is being exchanged. Second, intellectual property is not going to waste. Third, a lifeline is being offered to talent who might otherwise struggle to find a job in the current market. All of this benefits the economy at large.

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Where to Find Opportunities?

Companies on the lookout for such opportunities would be well advised to monitor bankruptcy and insolvency filing registers, media mentions of economic hardship and liquidation. Tools like BuzzSumo, Mention or even Google Alerts are also useful to identify media mentions.

Additionally, look for signals such as layoffs and mass standing down of employees as preemptive measures companies might take before they declare insolvency — peruse lists of companies freezing hiring or reporting layoffs.

The team from Candor have put together an impressive crowd-sourced list of companies that are freezing hiring and laying off staff which is being updated daily, here.

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