Government support programs have helped businesses stay afloat during the Covid-19 pandemic, but for some, survival has also depended on their ability to beg, borrow or steal.
Canadian businesses have taken on extra bank loans and turned to family and friends, credit cards and mortgages to secure more cash, the Canadian Federation of Independent Business (CFIB) said in a February report. Some were forced to take from their “future selves” by drawing on retirement savings.
Elke Rubach, principal at Rubach Wealth in Toronto, Ont., volunteers with Advocis Connect, a pandemic program for struggling business owners offered by the association for financial advisors. “There were some businesses that were so cash-strapped and leveraged that you could not help them,” she said. They had to shut down and give their landlords notice.
In contrast, Kyle Richie, senior vice-president and investment advisor with Richardson Wealth in Toronto, said his business-owner clients, many of whom have professional corporations, largely thrived financially during the pandemic, in part thanks to recovering stock markets and decreased discretionary spending.
Still, many clients said they now understand why he plans for disasters, Richie said. He expects the pandemic to result in a greater focus on financial planning.
“It’s shown the real need for talking about simple stuff like savings patterns, getting out of debt, not being overly leveraged,” Richie said. “The necessity for the fundamentals of financial planning has been magnified.”
While the pandemic’s impact has been disproportionate, all businesses face an unpredictable future. Covid-19 variants were surging in many regions at press time, with third-wave lockdowns impeding recovery.
“There’s still a ton of uncertainty,” said Jack Courtney, vice-president of advanced financial planning with IG Wealth Management in Winnipeg. “If I had a restaurant that serviced the lunch crowd in downtown Toronto or any major city … I probably still don’t know if I’m going to survive.”
Vaccines may have improved entrepreneurs’ longer-term outlook, but many are “still very much focused on immediate threats to their business survival,” the CFIB report said.
As business owners struggle with decisions such as whether to lay off employees, “it’s a huge opportunity — and an obligation — to rethink and refocus,” Rubach said. The financial planner’s responsibility is to help with that assessment, providing the panicked client with a larger lens through which to see the business, she said.
Cash flows and forecasting
When the pandemic hit, Rubach started by ensuring business owners (her own clients as well as those she helped through the Advocis program) had secured their personal finances. This included having insurance in place, for example, and assessing discretionary spending. Then she turned to cash flow.
“From scratch, we went through a strategic overview and cash flow analysis working with their accountants and CFOs,” Rubach said of her work with struggling business owners.
She added bookkeeping to her services so clients could focus on operations, and helped identify and cut discretionary expenses as well as fixed expenses not conducive to goals. “There were recurring charges for services they didn’t even need,” such as website hosting or coaching, she said.
She also had them consider investments in inventory and marketing, as well as relationships with employees and suppliers.
“Once things get ugly, you need people to be there by your side,” Rubach said, referring to the need for business owners to reinforce their relationships in a crisis. Suppliers may be willing to alter payment terms, for example.
Steve Ambeault, portfolio manager with Morrison & Partners, iA Private Wealth in Edmonton, said clients should consider if changes to revenue and expenses during the pandemic are permanent or temporary, and how these changes impact their financial plan.
Even as the pandemic wanes, cash flow will remain a concern, he said. For example, business owners need to remain vigilant about not increasing their business expenses too far ahead of revenue recovery.
As advisors monitor cash flow, they can also focus on cash forecasting “as a platform to understanding profit drivers,” Ambeault said.
For example, if a business increases its prices for products or services, would that boost profit or lose new clients? Would an additional employee increase profit? (This period of higher unemployment may be an opportune time to score new talent, Ambeault said.) How much revenue is required per month for the business to break even?
Engaging business owners with such probing questions is helpful, because they’re often unaware of what exactly drives profit when they’re busy with daily operations, Ambeault said.
“There’s an opportunity for advisors to step in and help business owners understand these issues more deeply, and thus in turn make the clients more profitable” and reduce business risk, he said. Increased profit would also help business owners repay the government loans they received during Covid-19 that were non-forgivable, he said.
Another opportunity during a strategic overview: bring the business owner’s better half on board. When spouses are busy caregiving, working as employees of other businesses or running their own businesses, they may be unaware of any planning, let alone planning that ill serves them.
“We brought the spouse to the conversation,” Rubach said, informing them of such things as complex tax structures and resulting accounting costs in the tens of thousands.
“There’s value in simplicity,” Rubach said, because clients who understand their plan are better prepared to act during a crisis — when their spouse dies, for example. When faced with complexity, both advisors and clients “need to ask better questions,” she said.
To do that effectively, advisors may require their own legal and accounting resources, especially when not all professionals they must work with will be team-oriented.
“The biggest challenge in my world has been building the right team of people that I can trust,” Rubach said. “You need to find people who understand the value of multidisciplinary advising.”
Making changes to a plan quickly has proved important during the pandemic. For example, Canada Emergency Business Account (CEBA) loans were initially offered based on salary, and many business owners have a salary/dividend mix for compensation.
In the early days of the pandemic, “things were changing very quickly,” said Andrew Feindel, senior vice-president and investment advisor with Richardson Wealth in Toronto. “As an advisor, it was important to reach out to clients and adjust [the plan] quickly.”
That included adjusting investments. Feindel and Richie (who work together) decided to tilt portfolio allocations more heavily to technology and health care. But that’s not always possible. Some dentists referred to Feindel’s firm during the pandemic had their money tied up in mortgage investment funds, which couldn’t be liquidated. Feindel said that, prior to the pandemic, many dentists could not conceive of being out of work for six months or more unless due to disability or illness.
Maintaining agility remains important at this stage of the pandemic, especially if clients have reassessed their priorities. For example, some clients now see greater value in insurance, Feindel said. Others may want to retire earlier, “which changes everything for their plan.”
Early retirement may be a possibility for a client near retirement age with a business that thrived during Covid. And retirement for many business owners means selling the business, Courtney said.
While not much planning can be done ahead of a near-term sale, owners who want to sell within the next few years should have a plan to maximize value. “Make sure the client is thinking four to five years into the future,” he said.
Factors to address during that period are having clean financial statements, effective marketing to attract buyers, key employees who can run the business, a diversity of client and supplier relationships, and recurring revenue streams. To ensure such things are in place, advisors can refer clients to other professionals, Courtney said.
Advisors can also encourage clients to work with their lawyers and accountants to position the business for a sale in terms of organizational structure — for example, ensuring that criteria for the lifetime capital gains exemption are met.
For other business owners, material changes such as increased debt or a spouse laid off during the pandemic will affect retirement plans and strategies, Ambeault said. A business owner who makes RRSP contributions, for example, may want to revisit that decision if they’re now in a lower tax bracket as a result of decreased revenues. “If the RRSP advantage has diminished … you may want to decrease salary and increase dividend,” Ambeault said.
Putting off retirement may be in the cards if negative changes persist. Based on a CFIB survey in March, 42% of business owners said they plan to retire later because of Covid-19.
“We’re showing clients projections that right now indicate they might have to retire later,” Rubach said. For a client in their 50s, making strategic business decisions now could see them back on track post-pandemic. For example, business lines that aren’t producing expected results could be cut, she said.
She also noted that clients should understand from the beginning that their plans are subject to change, which avoids knee-jerk reactions to crises. “We always talked about flexibility,” she said. As a result, “Of all our clients, not one called us in a panic” during Covid.
Sweat the details so clients don’t have to
As advisors help clients broadly assess their businesses and financial plans, details are important too. For example, business owners who took advantage of government support may not be aware of the associated requirements.
“Advisors are likely in a better position than business owners to understand some of the nuances of these programs and make sure that business owners understand the implications,” Ambeault said.
For example, the forgivable portion of a CEBA loan is taxable in the year it’s received — not the year it’s forgiven — and loans must be repaid by Dec. 31, 2022, to be eligible for forgiveness.
Rubach said an advisor can “make or break a family, business or legacy”; yet, too often, financial plans are used to justify selling products. During the pandemic, “Could I have sold a struggling client insurance?” Rubach asked. “Yes. And then what?”
She suggested advisors move beyond industry dictates on sales and education. “Learn more, reach out, be resourceful, be of service to your client,” she said. “Don’t be a salesperson.”
Overall, Courtney suggested advisors speak with clients to discover how they continue to be impacted by the pandemic, and how their views have changed. “Then, dig into it” using a team of professionals, he said.
Advisors who build financial plans have a key role on the team. “They can show the long-term impact of shorter-term decisions,” such as the compensation strategy, he said. “Sometimes, that changes the decision.”
Feindel said “true advisors shine” in a disaster by adapting quickly and evolving. That includes responding promptly to clients and implementing changes to their financial plans.
Many businesses won’t survive the pandemic. In September 2020, 58,000 fewer small businesses existed in Canada than in September 2019, according to Statistics Canada. The Canadian Federation of Independent Business (CFIB) said in mid-April that up to 181,000 businesses — roughly one in six — are at risk of permanent closure by the pandemic’s end.
More than half (53%) of businesses said they were worried about survival given their debt levels — $170,000 on average — and a slow recovery in sales, the CFIB said in a February report. More than one-quarter (26%) of business owners have been forced to draw from their savings, and 7% have taken from their retirement savings.
“Our personal resources have taken a real hit,” said a professional services business owner from Nova Scotia in the report. “In addition to the government programs, we took on more debt, collapsed personal RRSP investments and refrained from taking owner salaries.”
Events such as Sept. 11 and the pandemic prove that risk management isn’t theoretical, said Kyle Richie, senior vice-president and investment advisor with Richardson Wealth. While interest rates, market crashes and job losses are textbook examples of risk, “the risk that you don’t know about — that’s the stuff that keeps me up at night,” he said.
As a result, he plans for worst-case scenarios. “What if” questions, such as what if you get sick or have no sales for a month, are part of risk management whether a business is brand new or the client is ready to sell, he said.
Further, discussions must be followed by implementation. Financial plans with fancy graphs collecting dust on a shelf are useless, Richie said. “One of the great measures of success of a financial plan is how much of it is implemented,” he said.