CEO Hugh Cathey expects his investor-owned genetics company ChromoCare will have to adjust its financing after COVID-19 caused business to decrease 50 percent.
“We’re going to have to restructure our equity base and our debt base to be more in line with the fact that original expectations may not be met,” he says. “That’s going to be a real challenge, and I think a lot of companies are going to be in the same situation.”
Cathey is also concerned as an investor. He’s noticed slower decision-making and an increased focus on synergy dollars with potential acquisitions, such as a 50-person business buying an equal-sized company with the idea of bringing the total number of employees down to 60 or 70.
“That kind of thinking would be standard in large company acquisitions, but in the world I operate in, which is companies that are 50 to 100 employees, it’s painful,” Cathey says. “It’s very painful to think of the fact that you might make a decision to acquire a company that’s going to result in the loss of 20 or 25 jobs, knowing that many of the large companies out there are going to be right-sizing significantly.”
Cathey spoke with the Smart Business Dealmakers podcast about what he’s seeing in today’s market through the lens of both business owner and investor.
Listen to the full interview
How should entrepreneurs be refocusing their attention and priorities during the COVID-19 crisis?
The No. 1 thing is that we always say cash is king, whether it’s my business ChromoCare or whether it’s General Motors. Cash is king. We say that, but we don’t always conduct our businesses that way.
So, I believe that companies are going to be a little more debt adverse. A lot of the debt holders have been very patient, whether it’s landlords or vendors, and I’m not sure that we can expect that to be the case for the long haul. Companies are going to need to start to conserve cash more than ever, so that they have a cushion for payrolls and the other things that can’t be put off during a time like this.
I’ve been able to continue to fund my company out of my pocket, but that certainly has a time limit on it, and I wouldn’t want to have to go through that again. Our focus is going to be on hoarding cash as we move forward, and I think a lot of other companies are going to feel the same way.
Where should those looking to raise capital focus their efforts during the cap raise?
As I said, I think investors are taking a longer time, whether they’re venture capital, private equity, even angel investors. I circulate among all three of those. People are taking a longer time to make decisions about things, and so entrepreneurs who need capital to grow their companies are going to have to get more creative than they have in the past.
Things such as seller financing that might have been 20 percent of a deal in the past are maybe going to have to become 50 percent in the future. If people are able to maintain credit ratings, then they may have to be looking at bank debt. For the most part in entrepreneurial transactions, you don’t think of traditional bank debt as a resource, but it may have to be.
All of these issues may create some new pools of investors. For instance, take a large health system. A lot of the work that I do is in health care-related businesses, but we are hearing some of the large health systems, where they own 10, 15 hospitals in a geographic region, are pulling together internal venture funds. And that is not necessarily a place I would have looked to for capital nine months ago, or even six months ago, but those may be resources now.
Additionally, expanding one’s network among very high-net-worth individuals that have interest in a particular industry sector is an option. I think they are going to be having a lot of deals throw at them, more than they would have in the past, simply because it’s going to be harder for some of us to find private equity financing, if that’s what our pond of opportunities is in. Or, venture capital.