Mary Lynn WilkersonState Director(318) 342-5506www.lsbdc.org

Developing Your BusinessSurvival Strategy

Louisiana Small Business DevelopmentCenter Network

Based on

Surviving Extreme Events

by Daniel J. Alesch and James N. Holly

Public Entity Risk Institute

11350 Random Hills Rd., Suite 210

Fairfax, VA 22030

Phone: (703) 352-1846

FAX: (703) 352-6339

Web: www.riskinstitute.org

How Does a Disaster Affecta Small Business?

Possible problems for the business:• Property damage or loss • Owner/worker injury or death • Loss of communications, business records

and transportation • Loss of public services and utilities• Disruption of supply chain• Loss of business income • Changes in business’ economic base due

to changes in the community• Looting or rioting

Typical Response to anExtreme Event

“Getting back to normal” Get back to business ASAP Resume cash flow Do what I know best and do it as quickly

as I can

What Does it Mean to“Survive” a Disaster?

For a small business, “survival” is defined as the financial survival of the business owner.

Survival does not necessarily mean:• Continuing in the same line of business,

or staying in any business at all• Staying at the same location• Serving the same customers

Research Findings

First, disaster events cause problems for businesses unrelated to the amount of direct damage they sustain from the event and from related events.

Second, unless the business owner makes good decisions about recovery, the largest losses to the business come in the years after disaster and not from the direct damage of the disaster itself.

Research Findings

Third, things never get “back to normal.” The community almost always changes

permanently, creating a new business environment in which doing business the old way often results in operating at a loss for years and, then, when all equity in the business is used up, going out of business.

Finally, it is possible, if an owner takes the right steps, to not only survive a major natural disaster, but to achieve real business viability in the post-event environment.

Business Continuity Variables

Five major variables affect a business’s chances of resuming operations after a disaster in the same or a similar form.

1. The extent to which the business’s customers or clientele were affected

2. Customers’ ability to defer buying the business’s products or services, acquire needed products and services elsewhere without a significant increase in costs, or buy substitute products or services.

Business Continuity Variables

3. The business’s position in its industry, and whether it has kept pace with the industry’s major trends and innovations before the disaster.

4. The extent to which the business loses critical production time, inventory, materials, labor or capital assets.

5. The extent to which the business owner or operator recognizes and adapts to changes in the post-disaster market.

What Outside Help Will Your Business Receive?

The answer is, not a great deal.

• Charitable organizations primarily help individuals and families.

• Federal government assistance to business is minimal and usually in the form of loans.

• State government agencies may serve as conduits for some federal assistance.

• Local governments may offer loans to encourage rebuilding the tax base - with many requirements attached.

What to Do When a Disaster Occurs: As the Dust Settles

The key to surviving a disaster in the long run is developing a strategy that helps your business adapt to the changes in its environment.

Your strategy needs to be developed right after the disaster in response to the conditions around you, and often in the midst of significant uncertainty.

Developing Your Own Survival Strategy

To make a reasoned decision, you will have to evaluate the condition of:

• your business, • your customers, • your suppliers, • and your location.

List all your options and decide on a strategy that makes the most sense for you. Do this before you use your life savings, insurance proceeds or credit to reopen your business.

Develop a Strategy for Post-Disaster Survival – The Flow Chart

The following flow chart describes how to create a custom-built, post-disaster strategy that will increase your personal chances of financial survival, even if it means closing the doors on this business and finding another occupation.

Subsequent slides address the steps in the process described by the flow chart.

1. Assess Your Situation

2. Identify your basic goals and

desires

3. List your basic options

4. Want to continue in business?

5. Evaluate your business plan and

analyze the market and

location

6. Still sensible?

7. Is there adequate money and time?

8. Reopen the business

9. Monitor the business closely

10. Any problems?

11. Re-evaluate your business

plan with market and location

analysis

12. Still sensible?

13. Decide on key criteria for

choosing a new path

14. Update your list of options; compare

them with your current situation

15. Feel trapped?

16. List and evaluate obstacles

17. Evaluate each option

18. Choose a path and make

a plan

19. Implement the plan and move ahead

YES

YES

YES

YES

NO

YES

NO

NO

NO

YES

NO

Post-Disaster Flow Chart

Step 1Assess Your Personal Situation

Evaluate the damage to your home, injuries to yourself and your family, your employees and their families. How will personal situations affect the business?

Go to the business as soon as possible to assess the level of physical damage to the building, inventory, equipment, and business records. Salvage whatever remains of value and find a safe place to store it.

Can You Afford to Take Risks?

Reopening the existing business or starting a new one will pose financial risks. “Don’t wager more than you can afford to lose” is good advice. Consider:

• Your net worth • Your liquid assets vs. long term investments • Your age and your retirement needs • Your probable insurance recovery (Be

realistic: find out how much was really covered and whether your insurance company is solvent and can pay)

Has the Business Lost Important Assets?

Small businesses are more likely to fail after a disaster if they have lost significant assets. Consider the condition of your:

• Place of business

• Inventory

• Production equipment/processes

• Key personnel and institutional memory

• Business records

How Strong Financially Was the Business Before the Disaster?

Businesses that are smaller, weaker, and under significant stress before a disaster are much more likely to fail. • Reopening a marginally profitable enterprise

can be a draining and expensive process consuming all of an owner’s remaining financial resources, and may still fail.

• Even if the firm was strong before the disaster, will the extended period of closure cause a loss of market share and weaken the firm significantly?

Are You Able to Start Over?

After a serious disaster, it usually takes the same level of commitment and energy to revitalize a business as it did to start it.

• Do you still have what it takes to do it again?• Are you and your family in good health?• Has the disaster caused you severe stress? • Is stress affecting your decision-making?

The people who survive and flourish following extreme events are the ones who look around to see if it makes sense to continue, and consider other options.

Step 2 - Identify your Basic Goals and Desires

What are your basic goals and will reopening the business achieve them?

• Is reopening worth the effort and money? • Do you want to retire soon? • Was the business struggling before? • Will the business thrive in a different place?• Would you like to relocate to a new city?• Would your investment funds and insurance

proceeds be better used in a new business?

If any of these conditions applies to you, then it makes sense to reevaluate your situation.

Step 3 - List Your Basic Options

Reopen the same business in the same place, now or later.

Open a “new” business Open a new business in the same place as the

old business, or a different location. Open the old business in a new location.

Close, sell, transfer, or liquidate the business and retire or work for someone else.

Walk away from the rubble and don’t look back, and either retire or work for another company.

Appropriate insurance gives you more options.

Step 4 - Decision: Do You Want to Continue in the Business?

• If yes, go to Step 5 (evaluate your business plan)

• If no, go to Step 13 (decide on key criteria for choosing a new path)

Step 5 - Evaluate Your Business PlanEvaluate your existing business plan as if you were opening for the first time:

• Talk to the Small Business Development Center, SCORE, WBC, your banker, or consult reference books.

• Do a post-disaster market and location analysis.o Where are your customers? Do they still need/want your

goods and services?

o Are your suppliers still in business and able to provide your needs?

o Is your location still right for your business?

o What is the competition in the new environment?

• Estimate the financial resources required to reopen. Need a new building, or new equipment inventory?

• Can you retain key employees?

Effects on Customers

Whether it makes sense to reopen your business depends on what happened to your customers and on the business’ new environment.

• If all or most of your customers suffered large losses, there is little point to reopening quickly unless you provide something they need desperately or you can build a new customer base elsewhere.

• If your customers did not suffer major losses, they may already be buying somewhere else and you may have to fight an uphill battle to win them back.

Loss of CustomersYou can lose customers if their loyalty to your business is low, if they can easily find substitutes for your goods or services, or if your goods or services are inessentials. • A geographically concentrated customer base

can be disastrous when the area is damaged or destroyed, even if the firm itself receives no damage.

• Even if people who move away are replaced by others, you will have the challenge of winning the new population as customers.

• Can customers still get to your business (in person or electronically) to do business?

Effects on Suppliers Are your suppliers still in business? Can they still provide the goods and services you

need, at a cost you can afford and in a timely fashion?

Is transportation between your businesses reliable?

If you can no longer obtain the materials, supplies, services or utilities you need to operate, reopening may not be sensible.

Effect on Employees Have your employees moved away, been injured or

disabled? How long will it take to replace those who do not

want to, or are unable to, return to work? What will it take to retain key employees while the

business is closed? Will training new employees take a long time?

If you rely on employees, running the business without them will be difficult or impossible, so do not reopen until you have a workforce.

Effect on Competitors

If your firm has had significant damage and your competitors have not, then you need to know their status.

Make a hard-nosed (pessimistic) estimate of how much market share you will have lost by the time you are back in business, and how difficult it will be to recover it.

Step 6 - Is Your BusinessPlan Still Sensible?

This is one of the most difficult decisions you will have to make.

If the business plan no longer fits your situation, do not invest any more time or money trying to revive it.

Does the New Business Environment Reduce Your Business’ Prospects?

There are two barriers to making an objective and correct decision: • You are probably emotionally tied to the old

business plan unless you were having significant business problems before the disaster.

• It is very difficult to predict the future based on what is happening in the community at the time of a disaster. Remember this: disasters typically accelerate changes that are already underway (social, economic, political, demographic).

What Was the Status of Your Business Before the Disaster?

• If the business was growing and profitable, you may be able to do well after the disaster, depending on the status of your customers, suppliers, and competitors.

• If you were losing to the competition before the disaster, you are unlikely to do better after the disaster.

• If your firm is positioned favorably with regard to industry trends, your chances of surviving a disaster are much better than if your business was not advanced within its industry, or is in a declining industry.

Just How Bad Was It? How widespread and severe was the damage? If

damage is limited in scope or severity, the community is likely to spring back fairly quickly.

Are the power, gas, water, sewers, streets, bridges and telecommunications working or expected to be working shortly?

Is it likely to happen again? Some disasters, such as the September 11, 2001 attacks, are unlikely to recur in the same place and in the same form. Others, such as floods, may occur frequently. If you reopen in an area that is subject to recurring disasters, take appropriate precautions.

Will Your Present Location Work in the Post-Disaster Environment?

Is your building usable? If not, how long before it can be used?

Are other buildings available either for temporary use or for a permanent move?

Has the location lost or gained in value for your business? Is a major anchor store gone?

Are your customers gone? Can they get to you?

Demographics and customer needs often change after a disaster; don’t reopen in an area that is not right for you.

Does the Post-Disaster Environment Provide Opportunities?

Don’t rule out the possibility that the post-disaster environment can provide your business with opportunities, if your products and services match post-disaster community needs. Your business can also be altered to meet these needs and refocus on new opportunities in tune with the new demographics of the environment.

Don’t Allow Stress to Affect Your Decision

Some sources of stress:• Personal losses: injury to loved ones and

damage to property• Loss of primary source of income• Dealing with insurers

Delay in insurance claim paymentsMany complicated coverage questions from

insurersPressure by business income insurers to reopen

(because reopening terminates their payments to you)

• Lack of information from the community or building owners

Step 6 Decision Point – Does Your Business Plan Still Make Sense?

• If your business plan still makes sense, go to 7 (Do You Have Adequate Time and Resources To Reopen?)

• If your business plan does not make sense in the existing post-disaster environment, go to 13 (Decide on Criteria for Choosing a New Path.)

Step 7 - Do You Have Adequate Time And Resources To Reopen?

Even if your business plan still makes sense to you, other variables will affect whether your efforts to reopen will be a success.• Timing

• Resources

• Market

• Contracts

• Capital

• Your stage in life

When Should You Reopen?

Reopening right away makes sense if:• There is a ready market for your goods or

services, • You have a site from which you can do business, • You can get necessary supplies and inventory,

and • You and your employees are ready to work.

Your business must be able to produce in time to stave off new competitors and to keep your customers. Unless you can do that, there is little point to reopening.

Immediate Market Potential

Some businesses have significant market potential after a disaster:

• Building materials • Pharmaceuticals and health care• Fast foods• Groceries

Businesses that provide these and similar “necessities” will be in great immediate demand, and it often makes sense to reopen. Also, if your customers are located elsewhere and were not affected directly by the disaster, it makes sense to reopen.

Costs and Immediately Available Resources

How much will it cost to reopen immediately?

Be careful about following the “hard paths” of investing your life savings, mortgaging your home, or taking out loans in a rush to reopen.

Meet with your insurance agent soon after the disaster to learn how much of your losses were covered, how much you will probably receive, and when you can expect to receive it.

Don’t throw good money after bad when trying to revive a doomed business: think before exhausting your resources.

Availability of Materials, Inventory, and Production Processes

If you have a market and the resources, it may make sense to reopen if:

• You can obtain easily the inventory, raw materials, services and utilities you need to conduct your business.

• Your production facilities are relatively undamaged and can be put back into operation without excessive cost and delay.

Leased PremisesThe premises you lease may be unsuitable after a disaster for many reasons, including:

• Landlord failure to repair the premises within a reasonable time

• Extensive damage in the surrounding area that drives out other businesses and customers

• Loss of utilities or transportation infrastructure

If you choose to reopen in new premises, carefully choose a location that makes sense for your business.

Financial Assistance Businesses and their owners are usually not

eligible for federal or other grant assistance after a disaster.

Be wary of taking loans that require you to use personal assets, like your home, as collateral, or that will be “forgiven” if you stay in the same business in the same location. Staying rooted to the same location may kill your business.

Insurance proceeds repay you for loss of your assets and income stream, which may be a significant portion of your net worth and retirement assets. Be cautious about how you reinvest them.

Retiring?

Think carefully about reopening the business if you are nearing retirement.

If equity in the business is the retirement nest egg you expected to realize by selling the business or taking a draw from the business, take the course of action that best preserves this nest egg.

Step 7 – Make a Decision About Reopening

• If you decide that you have adequate time and resources to reopen, go to Step 8, (Reopen the Business)

• If you decide that you do not have adequate time and resources to reopen, go to Step 13 (Decide on Criteria for Choosing a New Path)

Step 8 - Reopen The Business

Reopen on the schedule that makes sense for you and your business. • Reopening too soon for your customers

typically means that your resources will be drained down by payroll and utilities.

• Reopening too late means you may lose your customer base or not have enough money to survive before the opening.

Step 9 – Closely Monitor the Business

Before you reopen, decide on your financial performance goals.

Monitor your business receipts, costs, and profit after you reopen.

Compare your financial performance to your goals and to your performance before the disaster, and look for any signs of growth or loss.

Step 10 - Identify On-going Problems Step 11 - Re-evaluate Your Business Plan

If your performance fails to meet your goals, re-evaluate your business plan.

If your business was reasonably successful before the event and you experience significant problems once you reopen, get professional help with the analysis of your accounting and production.

Step 12 - If The Business Still Makes Sense, Make Adjustments and Move Ahead

If your basic business plan still makes sense, make any necessary adjustments in goals, procedures, location and/or operations.

Continue to monitor performance and make adjustments to your business plan on an ongoing basis, responding to additional changes that may arise in the business environment.

If performance continues to be a problem, proceed to Step 13.

Step 13 - Decide On Criteria For Choosing a New Path

If you have reached this point, you have done lots of thinking and soul-searching and have decided that the business is not going to work: it is simply time to move on. Go to Step 14.

Step 14 - Update Your List Of Options

Return to Steps 1, 2, and 3, in which you assessed your current situation, identified your basic goals and objectives, and listed your basic options.

Think about the resources at your disposal and what you can do with them.

Make a revised list of your options.

Step 15 - Feeling Trapped and Step 16 - Dealing With Obstacles

You may encounter obstacles that seem (and some may be) insurmountable.

Be aware of what you can and what you can’t change.

Think of obstacles not as absolute, but as having “prices” (money, energy, time, foregone opportunities, etc.) associated with them.

By attaching a “price”, eliminating the obstacle becomes a decision as to how much you are willing to “spend” to remove that obstacle.

Step 17 - Evaluate Your Options

Evaluate the options you identified in Step 14 – think about:

• Your financial commitments (personal and professional)

• The required personal time and effort commitment for each option

• The potential rewards for success of each option

• The potential losses if each option fails

Step 18 - Choose a Path

Choose the option that best fits your:

• Long term personal and financial goals

• Available resources

• Family situation

• Assessment of the future of the business environment

Step 19 - Follow the Plan

• Adopt a new business plan for the option you choose

• Follow the plan

• Monitor and adjust the plan as required to meet new developments in the business’ environment

ConclusionYou have survived a disaster if you have made the most of the resources available to you after the disaster, whether you:

•Operate the same business, •Open a new business, •Enter a new occupation, or •Retire

If you follow the process outlined here, you will improve your chances of achieving the most favorable result possible given the challenges presented by the disaster.

Questions