Starting a new business always comes with some degree of risk, but what about launching a venture during a pandemic and a potential global recession? While we are living in uncertain times, 2020 remains a good time to start or buy a business.
One of the best deals I ever made was to enter into a 16-year office lease when New York City was bankrupt, and the newspaper headline said the President would not help New York City out of its financial difficulties. I had confidence in my City, and, within two years, the New York Real Estate Market heated up, and I was subsequently able to sublet my Park Avenue offices at a rent rate that was more than 500% higher than my original per square foot lease price. Similarly, although things look pretty awful for the business community today, we have confidence in the ability of our country to recover robustly later this year and next year. There are certain industries in which even the present long-term outlook is positive, including the software and internet content development, pharmaceutical, healthcare and home fitness industries, among others.
Potential Upsides for Startups
Although the COVID-19 outbreak is impacting the economy, it can be a benefit for start-ups in any industry. For one, given the government’s stated desire to provide funding on reasonable terms, you may need less equity capital to do business. The competition for jobs makes services less costly, and loan interest rates are at historical lows. Government-supported financing is being enabled through Presidential, Congressional and administrative agency actions, such as at the SBA. You may also have more negotiating power when establishing present contracts with vendors, landlords, and employees.
While venture funding will likely be available on more costly terms until the impact of the pandemic disease lessens, there is still plenty of cash looking for promising business opportunities, and, there may also be lessening competition for investors from other more highly affected industries, as they contract. Companies that show that they can survive during economic downturns are also in the best position to increase in valuation when times are good.
In our experience, although emphasis and opportunities differ, investors want to see some of the same things now as in good times. VC firms will closely examine the background, knowledge, and skills of your leadership team to determine if they have what it takes to run the company successfully. While “vision” is important, VCs also want good managers. For instance, they will be particularly interested in how the team’s experience can be used to manage the obstacles the young company will undoubtedly face.
Venture capitalists also want to make sure you are bringing something new and different to the market. Therefore, you should be able to clearly demonstrate not only that your product or service is unique and innovative, but also that it capitalizes on a void or need in the particular industry. The VC firm will also want to see what steps you have taken so far to develop the product or service as well as what remains to be done.
Of course, VCs also want to see the numbers. VC firms are always looking for companies that are on their way up if given the proper funding. Therefore, they will want to know a lot about the particular industry as well as your particular finances, including current and projected expenses, sales, earnings, and dividends. Your revenues or projections should show demonstrable expansion probability.
Buying a Small Business
The current economic uncertainty is putting a strain on many small businesses, and many owners may be looking for a way out. For entrepreneurs who are, due diligence is also a key part of the process. While buying an existing New York or New Jersey business can be less risky than starting from scratch, this only applies if you do your research and due diligence.
Most importantly, you need to know exactly what you will be getting — from the financial condition of the company to the existing employees to the building lease. It is also important to determine how the business has been and will be impacted by the pandemic and resulting economic fallout, particularly if it extends for a significant amount of time.
In many cases, and particularly in the current crisis, it is advisable to hold back a percentage of the purchase price for a certain amount of time, e. g. six months, to account for any unexpected costs or liabilities. You are more likely to pay or receive a fair price if you retain an experienced appraiser who can provide a detailed valuation of all of the company’s assets, including inventory, equipment, intellectual property and financial assets and obligations.
While we are living in uncertain times, there is a clear upside. For entrepreneurs, business opportunities that may have once been out of reach may now be attainable, if you take the right steps.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100