Eye on the Recession: Restructuring a Small Business
Posted by Menachem Lubinsky on August 9, 2010 under Recession | 
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By Menachem Lubinsky
A young 30-ish couple recently recounted what they called their “horror” story of a business and a livelihood that was about to collapse. After studying in a yeshiva for 5 years, David and his wife Molly opened a small retail store with money from in-laws and an older brother. The business appeared to be doing well during the first two years, enough so that they decided to expand the business to an on-line operation.
David admitted that he got “carried away” with the on-line, so much so that he apparently neglected the retail establishment. He used whatever profits he made in the store to prop up the on-line business. Within two years, he found himself with a mounting debt, insufficient take home funds, and a business that was on the verge of collapse. You guessed it; he blamed much of his troubles on a business slowdown due to the recession but a closer look showed that the economic downturn was only a minor factor.
Doing some forensics on the business, I found that it had potential and that it would be a shame to close it down. That’s when I recommended that the business retain a consultant to help restructure the business, or as I sometime believe is to restructure the “thinking” on the business.
The consultant divided the tasks at hand to include debt restructuring, infrastructure, and future business model. Although there were some bitter pills to swallow, David recognized that the alternative was to shut down the business altogether, something he shuddered to think about. He admitted that one of his hires was doing tasks he did in the beginning, but when he got busy with the e-commerce, he retained the help. The consultant forced him to lay off the “expensive” worker, to resume doing those tasks himself and to suspend further investment into the on-line business.
Molly, who had been led to believe that the business was doing extremely well, simply withdrew to care for her home and the children. She was very instrumental in the early success of the business. She seemed to have an excellent rapport with customers and did the buying very well. The obvious recommendation was for her to return to rebuild the retail establishment.
The debt restructuring went much better than expected as most of the creditors were only too happy to have the business continue in a recession. Some insisted on COD but most even granted the business better credit terms than before. A few were adamant that David share his plans for the future, to simply make them more comfortable that there is a future in the business.
One of the biggest challenges was getting David to reposition his thinking of the business. It seems that in the past he lost focus on his core business and “jumped” to other ventures. This caused him to perhaps overlook opportunities that he had with his original business.
Restructuring has become a necessity for many businesses dealing with the reality of doing business in a down economy. There is no cookie cutter model that applies to all businesses, but I have found that there are some common denominators, most of which David and Molly had to deal with. For example, many people allow debt to pile up simply because they are somehow convinced that better days lie ahead. When the sun does not shine, as expected, the roof can cave in.
I strongly believe that many businesses end up in trouble simply because they do not reach out for professional help. One business consultant remarked that not reaching out for professional help is like “talking to yourself.” It is really important to include someone who is not emotionally attached to the business and who can offer objective advice.
Reconstructing, say business experts, can sometimes simply mean retooling. They recommend that every business take stock of their status and re-evaluate the way they do business. What worked a decade ago may no longer be applicable in today’s rapidly changing business environment. There should be no fear of making a business “leaner and meaner,” the experts say.
David and Molly seem to be on their way to recovery even as uncertainty remains whether the economy as a whole is in recovery. They now understand the value of being focused on the profit center before venturing on to other enterprises. As it turns out, David has not given up on the on-line business and was at this writing negotiating with another entity to merge the sites. One of the benefits would be that the other entity has strong on-line management. Restructuring may not be for everyone, but then again, maybe it just is!
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