4 Ways To Prepare Your Cash Flow for Changing Business Cycles

By Mark Henricks

Having a healthy cash flow is a part of having a healthy business. Here are a few ways you can stay on top of your cash flow to ensure smooth transitions between business cycles.

Healthy cash flow is always critical, but it assumes even more importance when the economy is in flux.

After a decade of steady economic expansion, the possibility of a downturn should be considered in your business’ cash-flow plans, says James Cassel, co- founder and CEO of Miami investment banking firm Cassel Salpeter.

Questions about how long the expansion will continue, uncertainty as national elections loom and the effects of tariff wars are all affecting business owners’ moods, says Sonya Smith-Valentine, owner of financial consulting and training firm Financially Fierce in National Harbor, Maryland.

“I’ve noticed there’s a lot of unease, in general,” Smith-Valentine says.

“Everybody’s wondering what’s going to happen after the election. It’s making people hesitant.”

Not only should business owners start planning for a shift in the economic winds, they should start now, says Andy Cagnetta, CEO of Transworld Business Advisors, a Fort Lauderdale-based business broker.

“The speed at which things happen these days is much faster than it used to be,” he explains.

With that in mind, here are four ways to manage your business cash flow through the ups and downs.

  1. Watch your customers

From her experience riding out the last recession as head of a small law firm, Smith-Valentine suggests business owners worried about future business cycle shifts focus closely on their customers. As the 2008-2009 downturn built, she had to switch from mainly representing consumers suing credit bureaus to defending individuals against lawsuits filed by lenders.

“Luckily I saw the change coming,” she says.

By being sensitive to trends in her practice, she was able to switch emphasis to the part that was growing. And that let her maintain and even grow cash flow despite the downturn.

  1. Reduce your business

In addition to seeking new markets, Smith-Valentine worked to cut costs. She used an automated phone system instead of a human receptionist, reduced office supply orders and combed her spending for inefficiencies.

Having good timely data is crucial. One mistake we see is businesses letting that slip so they’re getting information 60 to 90 days old. That’s too late.

James Cassel, co-founder and CEO, Cassel Salpeter

“I was paying for access to two different programs when I only needed one,” she says. “I got rid of one of them.”

  1. Refine credit terms

Customer credit is another area cash flow managers examine to prepare for economic uncertainty.

Cassel stresses the importance of watching customers’ performance carefully, and taking action swiftly if a fast payer starts paying late. However, he says that rather than cutting off customers and driving them to rivals, it may be wiser to help customers through a rough patch so they remain with you.

  1. Keep cash and credit

It’s also important to maintain healthy cash reserves and, while business is good, consider obtaining a business credit card or expanding an existing credit line. It’s obviously easier to get credit approval when cash flow is strong than when a business is struggling to pay its bills.

Cagnetta’s firm maintains its line of credit even when cash flow and reserves are ample.

“We don’t have any money against it right now,” Cagnetta says. “But we keep it for a couple of reasons: To be strategic if we decide to buy something and in case of a rainy day so we have reserves.”

Other Cash-Flow Concerns

As Cagnetta noted, opportunity can arise in any economic environment. If a competitor struggles, it may offer the chance to acquire a rival at a bargain price. When competitors go under, surviving firms may be able to hire sought- after talent without buying the whole company, Cassel adds.

And in addition to scrutinizing receivables for slow payers, pre-recession may be an ideal time to encourage faster turnaround on invoices from healthy customers. Cassel suggests companies consider offering a discount for paying in 30 days instead of 60 days or otherwise accelerating payment.

“You have to be careful,” he says. “Some customers may get the discount and then slip back and still want the discount. So you have to stay on top of collections.”

Being careful is a central theme of how to manage cash flow during uncertain economic times. Growing too fast or taking on too much debt before a recession can hamstring a business. But being overly conservative and reining in growth when competitors are exploiting a continuing expansion can push a business to the back of the pack.

“It’s a balancing act,” Cassel says. “But you cannot bury your head in the sand like nothing’s going on.”

All told, information may be the most valuable commodity when preparing for a shift in economic fortunes. Even more than cash or credit, what distinguishes winners from also-rans when business cycles evolve could be having the data that will identify trends and suggest the optimal course of action, Cassel says.

“Having good timely data is crucial,” Cassel stresses. “One mistake we see is businesses letting that slip so they’re getting information 60 to 90 days old. That’s too late. You need to be managing your business daily, weekly and monthly, not quarterly.”

Read more articles on managing money.

Click here to read the PDF.

WeWork’s Options for Raising Cash Are Narrowing Fast Ahead of Its IPO

September 11, 2019
By Erik Sherman

What if they threw an IPO and nobody came?

In a week marked by “will they are won’t they” speculation about an upcoming IPO, and leaks that the We Company is considering slashing its once $47 billion valuation to some $20 billion—or maybe less—questions surround the high flying company’s future prospects.

But what might be the more pressing issue is how the company plans to solve its ravenous cash flow needs—now.

WeWork needs cash

The need for an IPO or some alternative all comes down to WeWork’s need for cash. Money has been flying out the door. In the company’s amended S-1 filing with the Securities and Exchange Commission, We saw in the first six months of 2018 a loss from operations of $678 million on $774 million in revenue. By the same period in 2019, it was a $1.4 billion operations loss on $1.5 billion in revenue.

In theory, WeWork could make money, according to Barry Oxford, who covers real estate for D.A. Davidson. “WeWork’s office space in and of itself is cash flow positive,” he said, comparing the revenue and operating expenses of the spaces. Oxford does worry about how well the business model would work in a recession. “Can WeWork get to cash flow positive and have enough of these spaces up online and stabilized before a recession or does the recession hit them before they’re stabilized, causing a lot of disruption to their business model,” he said.

The company has aggressively tried to build out its presence and secure more regular revenue, gobbling up cash in the process.

“This company right now probably needs to raise money to be around in five years … based on what they disclosed in their registration statement,” said James Cassel, chairman and co-founder of investment bank Cassel Salpeter & Co. “Their business model is to lock into these 10-, 15-, 20-year [building] leases.” Doing so allows the company to spread expenses for building out its co-working spaces over time, making the expense manageable. But the constant expansion means a need for ready cash.

We’s cash flow isn’t enough to keep things going. In the first six months of 2019, the company showed a net positive cash flow increase of $844.7 million, but only because it received $3.4 billion in cash from financing. Without the infusion, the company would have seen a decrease of more than $2.5 billion.

As of June 30, 2019, We had cash and cash equivalents of just under $2.5 billion. In other words, without an infusion from financing of that size, We would have been out of money and, potentially, out of business.

We is spending so much on marketing, overhead, and capital expenses for new locations, it doesn’t have enough operating profits to cover the bills. To keep on its current course, the company absolutely needs enough extra money to see it through the next few years until—hopefully—business dynamics turn around in its favor.

How much is WeWork worth?

An IPO was an obvious choice, especially at the $47 billion valuation the company sought. Additionally the company had lined up a $6 billion credit line from a group of banks, contingent on a successful IPO, Bloomberg reported.

But WeWork’s image has taken a beating with guaranteed control and sweetheart deals for CEO Adam Neumann. Many investors and market watchers pored over the S-1 and balked.

There were reported talks of at least two valuation downgrades in an attempt to make the deal more palatable, possibly bringing the IPO down to as little as a third of its original size. However, major investor SoftBank Group would have had to take a $4 billion write down and a $5 billion loss on its Vision Fund investment vehicle, according to Bloomberg. That would be particularly problematic as SoftBank is trying to raise money for a second fund.

“The fact that [We is] even considering going out with a valuation of a third of the last round suggests that the additional infusion is important to them,” said Chester Spatt, a professor of finance at Carnegie Mellon University. “These losses are clearly putting pressure on them to find some sort of funding solution.”

WeWork’s Strategy

The circumstances raise the question of what else We can do to bring in the money it needs. One approach could be to change the business model and stop the current drive for growth. “Then they have the ability to [plan] and see what they need to do to be able to get their existing operations cash flow profitable,” Cassel said. But Neumann doesn’t seem likely to scale back.

Another possibility is going to debt markets to sell bonds, which may be harder than it sounds. Data from Bloomberg shows that a bond that WeWork had issued in 2018 with a date of 2025 had been trading a few percent above its face value since the company released its IPO filing. News of the potential IPO postponement caused the value to drop below face value by 2.5% before returning to face value at the end of Tuesday trading. As of midday Wednesday, the bond was down an additional 3.4%

“It means they won’t be able to borrow money [easily or cheaply] as a private company,” said Barrett Cohn, CEO of private market investment bank Scenic Advisement.

Or there could be a rescue, possibly by SoftBank, either through financing for a bridge period so the company could stay afloat or an outright takeover. That would take billions and would seem unlikely to appeal to SoftBank, which would rather start its new fund than prop up the existing one.

The other options don’t look good. Or, as Cohn said, “They need to IPO.” Whether investors will show up is another matter entirely.

Click here to read the PDF.

5 things you should never cut corners on when growing a successful business

By James S. Cassel

When Wendy’s founder Dave Thomas was asked why his company’s burgers were square, he replied, “Because we never cut corners.” Thomas’ grandmother Minnie reportedly instilled this value in him, and his reply is a reminder that with some aspects of your business, you can’t afford to cut corners. Reducing effective marketing, customer service, employee benefits, and cybersecurity, or not nurturing your company’s core DNA, will cost you.

A study by marketing service OutboundEngine found that a staggering 50 percent of business owners admit to not having a marketing plan. It reports 55 percent of owners of small and medium-sized businesses (SMBs) spend less than 5 percent of annual revenue on marketing, and over 58 percent of SMB owners spent just five hours a week or less on marketing.

If the study is accurate, these companies are heading down a slippery slope. Keeping your company top-of-mind is fundamental to success and growth. Resources spent on strategic marketing is money you should get back with a healthy return.

Too often when times get tough, owners make ill-advised cuts to marketing/PR/ad budgets because they don’t understand the importance of these fundamental tools for stabilizing or growing a company. A business’ future viability requires not just cost controls, but revenue enhancement. Ill- advised slashing, or not putting in the time, effort or resources to successfully market your company will slowly deplete your business.

Remember not to under- or overspend, but work with your team to get your message out effectively.

Now, take a moment to consider the last time you reached out to a company and think about that customer service experience. Was it easy to find someone to handle your problem? Did the company resolve the matter quickly? If you’re a smart consumer and the answer was “no,” you likely moved on to another company to get that product/service.

Companies like Amazon and Lexus consistently rank as top customer service providers. Look to their efficiencies and strategies as a road map to your company’s customer service success. This is your front line of defense against bad-word-of-mouth and negative reviews online. Whether you’re building a culture of customer service, choosing the right vendor to handle inbound calls, or selecting digital customer service providers, in today’s era, with a negative review just a few clicks away, customer service is more important than ever.

Another area to support is your team, maybe your most important asset. If you hope to recruit and retain the top talent, potential and current employees need to know you’re willing to invest in them. Everything from company retreats, education, vacation time, and other benefits, matter.

Securing employee buy-in is directly correlated to how much you value your team, and how you treat your employees may ultimately affect how they deal with your clients and customers. If you have underappreciated employees, you’ll be faced with costly turnovers, problematic recruiting, or discover your employees are unwilling to deliver the level of service essential to your success. Little things matter when it comes to building esprit de corps. Don’t skimp here.

Underneath everything your company does, there should be a recognizable identity. Remember your mission and never forget your principles. You must know what your core DNA is, then you need to build and nurture that. And, if your company is growing, but its identity is being diluted, you have a problem. It’s time to regroup to ensure that the one good thing you are known for, is the one thing that never changes.

Finally, highly publicized trade secrets thefts and the Equifax and Capital One data breaches show there are malicious actors out there looking to target you next. Skimping on adequate cybersecurity measures to safeguard your customer data, trade secrets and intellectual property will end up costing you customers, while saddling your outfit with financial liability and huge image problems. All this can mean the death of your business.

Every company owner is faced with the task that only ends when the business ends: Ensuring that your operation is lean and efficient. But as you’re trimming costs, remember not to be pennywise and pound-foolish. There are certain things your business just can’t afford to do without.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co. jcassel@casselsalpeter.com.

Here are key business issues that presidential candidates must address

By James S. Cassel

With the 2020 election fast approaching, presidential hopefuls set on wooing business owners need to devise a courtship strategy based on more than platitudes. Given that many entrepreneurs are supportive of various Trump economic policies, and according to some polls, from a financial standpoint, feel he has their “best interests at heart,” candidates must address foundational issues — including taxes, regulation, labor, tariffs, the environment, healthcare, and income inequality — while remembering that this is still a capitalist democracy, not a socialist country.

First, although many business owners cheered President Donald Trump’s tax reform, there remains a sense that middle-market businesses benefited little, while big business and the wealthy were its main beneficiaries.

Candidates should define their plan for equitable taxes and which temporary breaks they would make permanent. It’s also important to remember the economic effect of both tax increases and tax breaks on the deficit, which recently hit a record $22 trillion and is still growing. This also needs to be balanced against social needs.

Regulation is another important issue. Under this administration, deregulation is driven by the requirement to eliminate two regulations for every new one added.

Business owners are generally supportive of deregulation as it can substantially impact their bottom line. Candidates should reassure business owners that under their leadership, government would be responsive, reasonable, and committed to eliminating red tape, while keeping in mind that many regulations are in the public’s best interest and end up saving money in the long term. For example, many states and companies do not want a rollback of auto emission standards due to the negative effects on climate, and ultimately, the economy.

Another key issue involves labor. Trump’s anti-immigration policies worry many business sectors, including agriculture, construction, and restaurant and hospitality, which rely on this labor.

Candidates should adopt level-headed approaches to this sensitive issue, neither avoiding it, nor demonizing immigrants — who are part of the ever- changing tapestry of this country and grow our economy. Without immigration, we would not have the same GDP growth.

Also, burdensome tariffs (ultimately a tax paid by consumers); a current, if fragile, truce in the U.S.-China trade war; and the looming threat of more tariffs, are part of the new reality for entrepreneurs, manufacturers, and farmers. Given how tariffs affect the supply chain, impacting the U.S. and global economies, candidates must develop a clearly articulated policy aimed at defusing tensions with China and other nations, while not ignoring trade problems and the transfer/theft of intellectual property.

Another issue, the environment, is a sore spot for green-minded business owners who decry Trump’s environmental record — including pulling out of the Paris Climate Accord and undermining the Clean Power Plan.

The environment has economic and global repercussions: It impacts insurance rates for businesses, can shut down supply chains, increases food costs, drives mass migration, and is not a matter that can be kicked down the road anymore. With the environment, a stalemate that continues to stagnate results in disaster for generations to come.

A sixth area is healthcare. While the administration has made clear its intention to repeal Obamacare, its proposed solution remains elusive, and we have yet to see what the courts will do. Uncertainty is a death knell for business owners.

Finally, presidential hopefuls should consider that increasing income for lower earners translates into more buying power and a stimulated economy. The current federal minimum wage is $7.25. Despite Trump’s campaign promises, it has not been increased in 10 years, although many companies have raised wages out of necessity to secure employees.

It is not sustainable to have to provide taxpayer-funded assistance in the form of food stamps and other benefits to those who are working 40-hour weeks, but still can’t make ends meet.

Thoughtfully fleshing out issues that matter to business owners will enable presidential hopefuls to stand out and gain support. These are tough issues, but they cannot be ignored by either the administration or candidates. In the political arena, where blustering, posturing, and unbridled contention are the modus operandi, a moderate, cool and balanced voice of reason could be an irresistible magnet around which America rallies.

James S. Cassel is a monthly contributor to Business Monday of the Miami Herald who writes about issues affecting the middle market; the views expressed are his and not necessarily those of the newspaper. Cassel is co- founder and chairman of Cassel Salpeter & Co., an investment-banking firm based in Miami.

How Might Rising Gas Prices Affect Your Business?

Elevated fuel costs are affecting everything from manufacturing to employee commutes. Learn how these business owners are offsetting rising gas prices.

By Julie Bawden-Davis

With rising gas prices currently sweeping across much of the U.S., there’s a good chance that your company will experience the effects in one way or another. Rising gas prices have a trickle-down effect on the price of many goods and services in a wide variety of industries.

“When fuel costs rise, producers tend to increase their sale prices,” says Brian McHugh, owner of McHugh Construction. He and his crew use half-ton or larger trucks that burn a significant amount of fuel.

“Our margins are better than businesses like retail, so we don’t currently have to raise our prices. If the increase gets dramatic enough, we would consider wrapping those expenses into the final sale price,” says McHugh. “In order to stay profitable, businesses with lower margins and price points are finding it necessary to increase prices or establish better purchasing terms.”

Effect of Rising Gas Prices

Michael Black is president of Goliath Trucking, a long-haul trucking company. Rising gas prices have had a profound effect on his business.

“Since our company is a direct consumer of high volumes of fuel, rising gas prices have caused a need for increased operating capital,” says Black. “The additional cash required to operate adds up quickly.”

It’s hard for businesses to escape the effects of rising gas prices, adds James Cassel, chairman and co-founder of investment banking firm Cassel Salpeter & Co.

“If your company produces or uses petroleum-based products, such as plastic, costs will increase,” Cassel says. “Freight costs will also rise as many carriers add a fuel surcharge.”

Rising gas prices also make it more difficult for employees to commute to work, believes Robert Sadow, co-founder and CEO of Scoop. (The company works with businesses to create managed carpool programs.)

“Your employees have the onus of finding alternative, more affordable methods of transportation,” Sadow says.

Kamil Faizi, owner of Challenge Coins 4 U, which creates custom military challenge coins, agrees.

“Commuting eats into employee paychecks, which can affect your company’s bottom line,” says Faizi. “You may need to pay employees more to offset rising fuel costs.”

Rising Gas Prices Lead to Increased Operational Costs

As fuel prices increase, it’s likely your business will have to absorb the added costs.

“Many companies will need to compensate for rising fuel costs by raising prices, especially if the increased gas prices continue,” says Hanna.

Increasing costs to the consumer will be necessary for Black.

“The margins in the trucking industry are too tight and competitive to take on the added fuel cost,” he says. “Increases must be passed along on the freight bill, which ultimately leads to the consumer paying more for products.”

To minimize the cost of rising gas prices, here are several countermeasures you may want to use at your company.

Adopt a work-from-home program.

At Challenge Coins 4 U, rather than spend more on employee compensation to offset rising gas prices, the company implemented a work-from-home program two days a week.

“As a way of handling rising gas prices and employee commutes, we allow employees to complete their work at home,” says Faizi. “As long as their work is being completed in a timely manner, there is no problem. I have found this to be an effective strategy that has never let me down.”

Start a managed carpool program.

“Managed carpool programs help consumers save on gas costs and offer the added benefit of improving employee-to-employee relationships and limiting employee attrition,” says Sadow of Scoop. “For instance, carpools can introduce people who ordinarily might not interact at work, which creates an increased sense of community in the office.”

Sadow suggests implementing an employee carpool system to offset rising gas prices sooner than later.

“Get something going as soon as possible so that the program can grow and scale,” he says. “It’s much better to add people to an existing program than to build one from scratch when you have hundreds of employees.”

If you don’t have many employees interested in carpooling, Sadow suggests pairing up with companies in your area.

“If a handful of companies get together and implement a solution across their organizations versus simply their own, they’ll better use existing resources and won’t compete for parking,” he says.

Examine fuel efficiency.

If your business involves transportation, you can help minimize the effects of rising gas prices by taking a close look at the various elements that affect fuel efficiency.

For instance, consider streamlining routing and dispatch. The shorter the routes and better informed the drivers, the less fuel your company vehicles will use. Dispatchers that track traffic in real-time can reroute drivers for better fuel efficiency.

“Ensure that the route is planned in the most efficient way possible and that the trucks are packed full for shipping,” says David Lecko, CEO of DealMachine, an app for real estate investors interested in off-market properties. His company uses drivers who report potential properties.

Other factors that affect fuel efficiency include vehicle speed, how often and for how long a vehicle idles and how well-maintained the vehicle is. Regular maintenance can improve fuel efficiency.

Plan ahead.

“Proactively manage the risk of rising gas prices by taking into consideration the effect of price changes during the budgeting process,” says Hanna. “When developing budgets, complete sensitivity analyses to identify how changes in key inputs or outputs impact the bottom line.

“Use these analyses to develop action plans,” continues Hanna. “By proactively developing a plan, business owners will be better equipped to manage fuel increases and other changes that might impact their bottom lines.”

It’s also possible to offset rising prices by increasing the purchase of products or raw materials now that are used by your company, believes Cassel.

“Try to hedge or buy futures, if available,” he says.

How to protect your company from the trade wars whack-a-mole game

By James S. Cassel

Are the trade wars a game of whack-a-mole? It certainly seems like it. You knock one down and another unpredictably pops up. What’s next? The EU? Japan? Australia?

It’s anyone’s guess, but just because farmers were partially bailed out of a multibillion-dollar problem caused by the current trade war with China, doesn’t mean you or your business will be so lucky.

The time has come to evaluate how your company will be affected by the escalation of disputes with two of our biggest trading partners, China and possibly Mexico. As it pertains to Mexico, we have a reprieve for now, but in the game of whack-a-mole you never know what’s going to pop up next.

So, here’s what you should be doing to ride out the disputes:

First, take a hard look at your business to determine where you are exposed. Ask yourself tough questions. Will these trade wars affect your supply chain or customer base? Do your company’s products use technology developed by Chinese companies, and if so, can that technology be used against your company to steal trade secrets or surveil your customers? Do you own or control a factory in China or Mexico and what will these trade disputes mean for those operations?

If you’re selling to China or other countries, this is a good time to determine if tariffs will mean your prices will increase to the point that you are no longer competitive. Will increasing prices affect your volume and margins?
You should monitor the changes to learn what your company can endure and what it can’t.

You must drill down and evaluate what issues might arise for your business. If you depend on Chinese business partners, or even employees, it’s time to reconsider how dependent you are on them, and whether there are any viable alternatives in the short term, and maybe even for the long term. If you are primarily doing business with Mexican partners and a tariff is instated, alternatives may prove scarce.

Another issue to consider is one that so many U.S. companies already know. The price of doing business in China will many times mean giving up or compromising your intellectual property. So, in deciding if and how to cut ties with China, you must be careful to ensure you are not creating your own competitor in the process by figuring out how best to protect your intellectual property.

Mexico presents a different challenge. Its proximity to the U.S. and lower labor costs will be hard to replicate elsewhere. It might only be possible to move manufacturing back to the U.S. and suffer increased costs and capacity issues in the short term. Though some of those expenses may be partially offset by lower shipping costs.

If you do have a factory in China, now may be the time to consider moving it to Vietnam or another part of the region. You will have to calculate the viability of moving that factory, as well as the time it will take to move your operation. You may even wish to take it a step further and consider that now might be the right time to replace your workforce altogether by investing in robotics to streamline operations and reduce the number of employees.

You may also want to renegotiate existing relationships to lower costs, modify your business model by increasing your prices, or get suppliers to absorb the added costs that come with tariff increases. Do some research to find out if there are any suitable substitute suppliers. Try and find businesses that offer similar costs and capabilities that you can work with.

Some say the trade wars will go on until the next election; some predict it will last even longer. Whatever the outcome, your work begins now. Those who get caught in the crossfire later may find themselves with surprise competitors built on stolen intellectual property, sagging sales or increased costs that will simply price you out of competition.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies.

From GoPro to Lenovo, Trump tariffs would have raised prices on tech from Mexico

By Ed Oswald

President Donald Trump’s now-scrapped plan to impose a 5% tariff on Mexico starting Monday could have made a major impact on the cars and tech Americans love.

The impacts may seem less obvious than the tariffs the Trump administration imposed on China in early 2018. Americans depend on Chinese manufacturing for products like iPhones, computers, and TVs, as well as the components inside. But Mexico is a major producer of cars sold in the U.S., along with computers and electronic parts.

Mexico is second to only China in the number of computers it exports: GoPro will manufacture U.S.-bound devices in Guadalajara later this year. Foxconn, which manufactures a ton of brand-name tech products, has multiple factories in the country, and Universal Electronics will soon move remote control manufacturing from Mexico to China.

Tech manufacturers are likely happy that the tariffs aren’t going to happen (for now). Trump tweeted Friday that the U.S. had reached an agreement with Mexico in order to stop the tariffs, though he did not give specifics on the deal.

Trump initially said he’d increase the tariff by 5% a month, to a maximum of 25% by October 1. Such punitive measures would have had far-reaching effects and American consumers would likely foot the bill on a variety of tech products.

That said, deals like this are fickle and tariffs could still come in the future. Here’s how an escalating U.S.-Mexico trade war would impact tech:

THE BIGGEST LOSER: AUTOMAKERS

Mexico’s largest export to the U.S. is in automobiles and auto parts. At $116 billion annually, a third of its exports are U.S. bound, according to Census Bureau statistics. Cars are where American businesses and consumers could feel the most pain. Thanks to free trade, automobile manufacturing often spans North America.

Take the modern Volkswagen Passat. Manufactured in Chattanooga, Tennessee, the engine is built at the automaker’s Silao, Mexico plant, but contains parts manufactured by partners across all three North American countries, as well as China and elsewhere. It’s incredibly difficult to find a car in the U.S. that’s completely manufactured here.

It’s important to mention that the level of exposure varies manufacturer to manufacturer. Volkswagen stands to lose the most because it imports nearly half of its automobiles sold in the U.S. from Mexico, Cars.com executive editor Joe Wiesenfelder told Digital Trends. But U.S.-based automakers have plenty to worry about too: Ford, GM, and Fiat Chrysler also import significant numbers of fully-manufactured cars back into the U.S.

This may be the biggest threat of Mexican tariffs. “Though the Chinese tariffs are a full 25%, they affect only two major models, SUVs from Buick and Volvo,” Wiesenfelder explained. “If the proposed Mexico tariffs happen, they’ll start at 5% but will encompass both many assembled vehicles and countless auto parts.”

Wiesenfelder noted that all automakers with plants in the U.S. source parts from Mexican factories, so the effects could be much further reaching than some might expect.

If a deal falls through and tariffs eventually do take effect, the end result might be higher prices for new cars, but it’s hard to say if prices could rise in time for the 2020 model year. “If it turns into a standoff, however, I think it’s likely we’d see prices increase. Because so many brands are affected, it’s more likely the automakers will pass on some of the cost rather than absorb it indefinitely,” Wiesenfelder said.

Not good news for an industry with an already difficult market thanks to higher interest rates for many borrowers.

A U.S. TECH MANUFACTURER SOUNDS THE ALARM

It’s not just automakers that are concerned. Illinois-based component and accessory manufacturer OWC says it has focused on bringing its manufacturing back to North America, but the threat of new tariffs poses a real threat to its business.

OWC manufacturers around 3,000 different products, ranging from hard drives to solid state drives, PC docks, memory kits, and even smartphone cases. With annual sales of $125 million, the company has done well by pairing its offices in Austin and Brownsville, Texas with its manufacturing facilities in Matamoros. But tariffs would threaten the future of this strategy, and he says both sides of the border will be affected — and people could lose their jobs.

While CEO Larry O’Connor told DigitalTrends that OWC could weather a short term 5% percent tariff on Mexican imports without an effect on its workforce or prices to the end consumer, the threat of higher tariffs is unacceptable.

“A longer-term 25% tariff on Mexican imports could be devastating to our business, our customers, and the hundreds of team members in Mexico,” he said. O’Connor lamented the uncertainty caused by the Trump Administration’s trade strategy, arguing businesses need ” a level of consistency and predictability to operate successfully,” and that a long-term tariff battle could spell trouble for his company’s plans.

“If the proposed tariff situation regarding Mexican imports is not resolved quickly, OWC will have no choice but to reconsider our overall North American manufacturing strategy,” he warned.
But it’s not just OWC that will be affected. Much larger companies stand to lose as well. Dell and HP manufacture their computers and other peripherals in Mexico: Cisco uses a Mexico-based partner for components. Apple uses at least three component suppliers with ties to Mexico, while Lenovo has multiple production lines in the country.

‘IT’S POSSIBLE FOR THEM TO GET HIT TWICE’

Trump’s insistence on tariffs as a method of trade negotiation will have a compounding effect, say economic experts. James Cassel, co-founder and investment banker with Cassel Salpeter & Co says that some tech companies may find themselves dealing with new costs they hadn’t planned for, in multiple aspects of their business.

“With tech companies using an international supply chain, it is possible for them to get hit twice,” Cassel said. It’s common for components to be sourced from multiple regions — so your tech gadget might have a circuit board or other parts from China, but assembled in Mexico. It’s the nature of the globalized economy we live in. And it’s not like these companies can make major shifts overnight.

“I do not believe that companies, whether manufacturing tech gadgets or anything else, have had sufficient time to shift production to Mexico from China, if they did not already have production in Mexico prior to the tariffs,” he argued. In the short term, those costs are going to be eaten by these companies, and more likely passed along in the form of higher prices for a wide variety of products in the longer term as the trade war ravages on.

Like O’Connor, Cassel also took the Trump Administration to task over its seemingly haphazard trade policies, and the unpredictability it brings.

“What is really of concern is that we are being forced to play whack-a-mole where companies that produce tech components need to be ready to respond at any moment to another challenge that pops up,” Cassel said

That’s the issue that many tech manufacturers seem to not have an solution for, and has many of them scrambling to contain the damage.

Re-skilling employees for the jobs of tomorrow

By James S. Cassel

In a rapidly shifting world where business models are being reinvented, digital is king, and automation is the endgame, companies must be forward- thinking to survive — particularly given the tight labor market.

Adapting to seismic change requires having employees with the right skill sets, which may be best achieved by retraining your staff. You have an obligation to help reskill employees for the jobs of tomorrow, but the process has challenges, including pinpointing weaknesses and securing employee buy- in. To succeed, a clear road map must be developed and executed.

First, identify your company’s objectives. What are your immediate, medium, and long-term goals and needs? For example, if you own warehouses, your immediate objective may be to implement enhanced commercial two-way radios, laptops, or scanners.

Your medium-term goal might be to introduce a conveyor system that partially automates unloading trucks—technology that Walmart is currently incorporating into its stores. Long-term, you might want smart robots that handle all warehousing needs, following the example of Amazon and JD.com, China’s largest retailer.

As you identify company goals, determine what employee skill sets will be needed to transition into the future. Automated warehousing necessitates a staff to train, maintain, and repair the robots. Reskilling now will ready workers for those tasks, while having an understanding up front of what robots cannot do, will help management fill in the gaps.

Next, develop a plan, timeline, and budget detailing your business objectives and breaking them into manageable steps. Refine the plan as your reskilling strategy develops.

A sound strategy begins with taking inventory of your employees’ current skills, as well as their strengths and weaknesses. Enlist the help of supervisors to identify both skills in place and those that are lacking.

In assessing your staff, prioritize employees who have proven their mettle, loyalty and cultural fit; their continued employment and livelihood should be protected. For each employee, identify skill adjacencies to facilitate training for new positions requiring similar skills.

If you are entertaining the “buy, not build” talent acquisition strategy, remember there is always risk in external hiring. Although you may be acquiring a skill set you don’t currently have, new employees may not share your work ethic or company culture. As the saying goes, “Better the devil you know…”

Open internal lines of communication, review training options, and keep your team engaged and motivated. Show your employees the importance of being future-ready; listen to their ideas and concerns and engage the process as a unified team.

Unavoidably, as you future-ready your company, some workers won’t sync up with company goals or will refuse to learn new skills; assist in outplacing them. In the long run, it will be good for both them and the business.

For flexible employees, evaluate alternative forms of training, such as bringing in contract trainers, accessing webinars and e-learning platforms, or paying for them to pursue coursework and degrees on their own time.

Based on individual needs, consider implementing a mix of training options. Some people may have to commit to night school, while for others a few webinars may suffice. Boost employee buy-in by keeping their sights set on stronger outcomes, including higher compensation. Share the benefits that everyone will gain from more productivity with fewer people. Amazon’s 16- week certification program enables warehouse workers to become data technicians—and double their salary! Better pay is also important to retain talent and ensure that after investing in training, your employees aren’t snatched away by the competition.

Business owners are generally aware that in a transforming world, the way business was done yesterday won’t fly tomorrow. The problem is that rather than plan and prepare, many are playing ostrich and hoping challenges will somehow disappear. With autonomous technology taking over, truck drivers, for example, might become as extinct as dinosaurs. Businesses that don’t evolve will suffer the same fate.

Avoid insurmountable issues tomorrow by tackling them today. Take a hard look at your business, where you want to take it, industry and technology trends, and how your team measures up. Then, focus on implementing your plan. Reskilling may not be for the faint of heart, but neither is conquering tomorrow.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., an investment-banking firm based in Miami. jcassel@casselsalpeter.com or via LinkedIn at https://www.linkedin.com/in/jamesscassel.

How to find and retain talent in a tight labor market? Flex your creative muscles

By James Cassel

In the past, when my colleagues lamented over their hiring difficulties, I asserted that there was plenty of talent available in the area — and regardless, South Florida would always be able to attract qualified employees. Having now experienced first-hand hiring challenges as our own firm grows, I believe I was wrong.

With unemployment around 4%, the talent pool appears to be running dry. The just-released 2018 Greater Miami Chamber of Commerce Executive Survey indicates that the top concern among area executives is finding and retaining qualified employees. Nationally, according to Aptitude Research Partners, three in four hiring decision-makers say that, “ finding quality candidates is their #1 challenge.” To grow, despite this difficulty, companies must aggressively recruit.

First, announce on a range of channels that you’re hiring. Post available positions on all top job sites, including Indeed, Monster, and LinkedIn. Consider supporting these efforts with digital advertising, a cost-efficient means of targeting the segment you’re after.

Other valuable channels for accessing talent include headhunters and your network. Speak to clients and vendors—particularly any that are downsizing—as well as employees, friends, and family. Contact organizations that could help you tap into the local workforce, like colleges, chambers of commerce, and business councils.

Having broadly disseminated your talent needs, contemplate candidates that aren’t currently in the workforce or don’t fit a traditional mold. Parents raising kids and other homebound caregivers ready to rejoin the workforce are often discounted due to lack of recent experience, which training can readily overcome. Offer workshops and mentoring to re-sharpen skills.

Also important are underemployed, semi-retired, and retired individuals who bring a wealth of knowledge and experience. On the other end of the age spectrum, internship programs can yield employment offers upon graduation, giving you a leg-up on the competition.

It’s also wise not to discount applicants lacking some credentials. Motivation and a good work ethic often surpass a degree, and many of the best employees don’t always look perfect on paper.

Capturing and retaining talent also requires offering compelling pay, benefits, equity or profit sharing, and perks. 2018 saw wage increases across companies and industries, including Walmart, American Airlines, and Comcast. Prioritize competitive salaries and reward existing employees with annual raises, which shouldn’t fall below the 3.1% national average. Equally important is vacation time, which can be a reward for tenure, increasing annually. Keep an eye on how your competitors are compensating, it’s very costly to lose good people to others who are willing to pay more.

Offer desirable perks, such as childcare or a gym membership, and implement a plan for out-of-the-box benefits, which may include assisting with the costs of certain medicines or treatments not typically covered by insurance plans. Helping to pay off student loans has also become a hot new benefit. Create a culture that is inclusive, supportive, enjoyable, and prioritizes giving back to the community and your employees won’t want to go anywhere else.

A general dearth in people for hire needn’t block your upward momentum, but it requires a paradigm shift in thinking. The challenge in finding and retaining good talent is to scrap preconceptions, think strategically, flex your creative muscles, and keep seeking. In the words of Zig Ziglar, “There is no elevator to success. You have to take the stairs.”

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., an investment-banking firm based in Miami. jcassel@casselsalpeter.com.
At LinkedIn: https://www.linkedin.com/in/jamesscassel

Buying a company? Due diligence is needed — and it’s a balancing act

By James Cassel

In 2011, Hewlett-Packard acquired a company called Autonomy for over $11 billion. Unfortunately, after the acquisition, HP found out that Autonomy’s management had committed fraud. For years, prosecutors alleged, Autonomy had been cooking the books ultimately resulting in HP being swindled and lots of litigation. It’s a great, albeit costly, lesson on the importance of proper due diligence.

The amount of due diligence needed when purchasing a company is a balancing act. One has to take into consideration the available resources. You often have to decide whether to drill deeper when a red flag arises, even as you try to determine if it’s feasible or not to proceed with the deal. But you shouldn’t be penny-wise and pound-foolish. There are areas you must target and costly services you must use. That’s just part of the cost of any deal.

Company finances are a good place to start. It’s costly, but hiring an experienced accounting or consulting firm is essential. You are looking for the true financial picture of the company. You need to know whether the company is growing or shrinking, its profitability and cash flow, its capital needs, its customer concentration, and its relationship with its suppliers.

To get this information, a financial audit may be necessary, as well as obtaining a quality of earnings report. Beyond looking at the balance sheet, a quality of earnings report provides a true financial picture by looking at the financials, books and records of a company, including its EBITDA, earning power, cash flow, financial systems and its accounting principles and policies.

You should also conduct operational due diligence, looking at the company’s main operations to try and determine whether its current facilities and capital expenditures are in line with its present and future operations and that everything is in good condition. You might also want to conduct some commercial due diligence to review the market position of the company’s products or services. If you’re concerned about the company’s exposure to reputational issues, you may want to conduct IDD, an integrity due diligence. And of course, legal and regulatory due diligence is required to be performed by lawyers.

There’s a due-diligence provider for almost every aspect of a company, from its IT to its IP, but before you begin any of them, you’ll want to research the company’s leaders. You might be surprised what a simple Google search can yield. Compromising reputational matters, strained relationships with clients or suppliers, even fraudulent activity, can often be discovered with a few clicks of a mouse.

When you find something amiss, take a step back and review what can be fixed and what can’t. Sometimes a price adjustment works. Sometimes it’s best to walk away. But sometimes, you may find that the issues can be resolved or overcome, and the deal can move forward.

If the issue is something like sloppy bookkeeping, perhaps a good financial professional can clean it up. Maybe it’s just that the company isn’t running efficiently. In that case, you can hire a process improvement expert.

Even if it comes to pass that you do all your due diligence and everything checks out, remember that even with the best due diligence, you can’t always find fraud until it’s too late. For that reason, you might consider insurance in case everything isn’t on the up and up. Representation and warranty insurance may cover certain losses resulting from a violation of the representations and warranties that were made to you by the seller, whether intentional or not. It can be a useful tool to protect you from potential exposure should it arise.

But some problems can’t be fixed or are just too costly to fix. If that’s the case, you must walk away. And if you didn’t, and find yourself in a situation similar to HP’s, then it’s time to take a step back and see where your due diligence might have failed. Don’t look for another deal until you understand what you did wrong and how you missed the problem. A costly mistake can still have value if it teaches you how not to repeat it.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., an investment-banking firm based in Miami. jcassel@casselsalpeter.com.
At LinkedIn: https://www.linkedin.com/in/jamesscassel