Restructuring your business

COVID-19 showed how quickly a business can be forced to restructure. The lessons apply beyond any one crisis.

There are 2 parts to a restructuring. One is the legal aspect, which changes depending on your specific context. During the COVID-19 crisis, governments let businesses defer many fixed costs, such as salaries, rent and taxes, and offered access to loans, at least in theory. In any crisis, look closely at the support available and the obligations it creates.

But all that is just doing one thing: creating a ton of debt that’ll come back to really bite you. It’s not solving anything, it’s just pushing the pain off into the future. Is your business going to be able to take that future pain? Are you going to be able to pay off all that debt? And most importantly, are you going to be able to pay off all that debt when the world economy takes forever to get moving again, when your revenues over the next months or years are down 20, 30, 50%?

That’s… a lot.

That’s why you need to restructure. You need to reduce your costs as much as possible, and you need to come out of the crisis period with a business that’s lighter than it was before. I know it’s not what people want to hear, because one thing it means is letting employees go, and that has a real impact on people. But as an entrepreneur, you need to ensure that your business not only survives, but thrives — otherwise, you aren’t going to employ anyone. It’s the only way you’ll be able to keep hiring people again when your business is doing well again.

So let’s get into the actual business aspect of restructuring — which, by the way, is way less obvious than the legal side and has way less information available online.

Be upfront and honest from the beginning about any necessary staff cuts. If employees will have to leave, tell them as soon as possible, while respecting the process that applies to your situation. Temporary support or deferred decisions should not become an excuse to leave people in the dark. Some people may be willing and able to find another arrangement. If your team knows and appreciates one another, some employees may want to freelance, for example in development or graphic design. But accept that, if no workable agreement can be found, you may have to let people go.

I know that lots of people will scream at me about that, but that’s ok. I’m not here to talk about the bigger picture or how society should respond to this crisis. I’m talking about how to save your business and make sure it gets to a point where it can grow and thrive. This world we’re in isn’t going to get back on track by following the rules that were in place before. The COVID-19 crisis has been called a war, and you need to adopt that mindset.

Once you’ve reduced your salary costs as much as possible, get obsessed about your costs. A good place to start is by just cutting 100% of your payments. Cut it all — business credit cards, bank accounts, make it so that no one in your company can spend anything. And you tell everyone in the company that 100% of whatever they want to spend, they have to come to you.

You have to understand, line-by-line, the expenses that are critical for your business. And for each line, judge whether it’s absolutely necessary or whether you can switch to something else. Remember that you can renegotiate everything. Everything. Get on the phone and talk to people.

And make the tradeoff. If there’s a free tool out there that you can use, and it’s half as good as the one you’re paying €500/month for, well, it’s half as good but it’s infinitely less expensive. Infinitely less expensive when cash is scarce is a no-brainer.

Because usually there are 2 ways to make more money: either you earn more, or you spend less. If you know me at all, you know that I’ve spent years saying to go out and find ways to earn more. But during a crisis, there are 2 problems: you don’t know if you can earn more, and you don’t know what your ceiling is. That uncertainty means that in the short term, you need to make radical decisions and spend as little as possible.

The third step of restructuring is profoundly rebuilding your business model.

In a crisis, you have to refocus 100% on your core activity. Whatever you have that’s adjacent, experiments, diversification, etc. Forget about it. Cut it all, and put all of your efforts on your core business.

One last thing. Refocusing on your core also means revisiting your prices. I know many of you will resist this, but a crisis can be a moment to increase prices if your customers’ demand and ability to pay support it.

A crisis is a moment when money is less available. It doesn’t flow as quickly, doesn’t flow as far. But the people who have money in a crisis, they end up having more available. So you’re going to have fewer clients, but the ones you have will have money to spend. Collectively, we’re becoming poorer, but individually, some people are becoming richer.

Think about sectors whose demand rises during a particular crisis. During COVID-19, video games, dating and intimacy apps, and telemedicine offered examples of activities that could benefit from people spending more time at home.

If your company serves a growing need like that, review whether you can increase prices and improve your margin. The opportunity depends on your actual customers and market.

The key to rebounding is having money to invest when things start moving again.

This can give someone starting from zero during a crisis an advantage over an established business. A new company can build cleanly, without first having to unwind the staffing and organizational decisions described above.

But no matter if you’re restructuring or starting from zero, you need to be completely focused. Succeeding during a crisis is all about being strong, having no fat, being absolutely disciplined, and thinking about the short term. Long-term business models have no place in a crisis (and in startups, they weren’t great before either ;).