Restructuring your business

COVID-19 is the catalyst, but this won’t be the last crisis entrepreneurs face.

There are 2 parts to a restructuring. One is the legal aspect, which changes depending on your specific context. Right now, we’re in a world where governments are letting businesses both put off a lot of their fixed costs (salaries, rent, taxes, etc.) and access loans — theoretically, at least.

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 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.

The first thing is to be upfront and honest with people from the beginning about the personnel cuts you need to make. If you have employees who you have to let go, tell them as soon as possible. They might be on various government programs during the crisis, in France we talk about “chômage partiel”, but you need to tell them ASAP that when things change and it’s possible, you’ll be letting them go. Some people might even be willing and able to help you out. After all, if you’ve built a business where people know each other & appreciate each other, you could have some employees who could want to start freelancing right now — developers, graphic designers, there’s a lot of demand out there. But accept the fact that if an agreement can’t be found, you may have to simply fire people.

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 in today’s situation 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 today, 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.

This is one I can really testify to, because at The Family we’re always experimenting. We’re investors, we want to diversify, and for the past 7 years we did a lot of that. But today, the current situation means that we have to refocus 100% on our portfolio investments. So we stopped lots of activity, we sold off some holdings, we spun off some businesses, etc. Everything that wasn’t our core business, it had to stop so we can get through the crisis and be ready for what comes next.

One last thing. Refocusing on your core also means coming back to how you price your business. And I know that 98% of you won’t listen to me, but right now is the moment to increase your prices.

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 what’s doing well: if you’re a video game company, you’ve never had so much money. If you’re a sex app, you’ve never had so much money. If you’re in telemedicine, you’ve never had so much money.

So if you’re one of those companies, or if you’re working with them, you’re in a moment when you can increase your prices and boost your margin.

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

By the way, that’s why people who are starting from zero today are in a better position than people who started a year or two ago. They’re able to build clean, they don’t have to worry about all those early steps that I talked about above, they don’t have to deal with HR and firing people or anything like that.

But no matter if you’re restructuring or starting from zero, you need to be completely focused. Succeeding today 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 ;).