Assessing Business Risk After COVID-19

COVID-19 has caused unprecedented to business owners both large and small. The new reality is that things simply are not going to be the same going forward. Business owners must face some tough new realities when it comes to ensuring that disruptions to business operations are minimized in the future. The global pandemic and accompanying stay-at-home orders have provided an opportunity for businesses to step back and reassess areas where risk can be better managed and disruption potentially minimized.

Contractual Force Majeure and Termination Rights

Review existing agreements and assess whether the wording of force majeure provisions is sufficient to protect your interests. Many clauses have previously been written to cover scenarios arising from civil unrest, catastrophic weather, and acts of terrorism, but there is some grey area when it comes to a pandemic or health-related issue that significantly hinders the ability to perform. Governmental orders making performance impossible, potentially like the stay at home orders we are currently seeing, may be sufficient to excuse performance, but the specific wording of the contract is important to consider.

 In the context of commercial leases, tenants will need to pay special attention to early termination clauses and force majeure provisions. Landlords commonly require the payment of rent to be carved out in a force majeure provision, even one that effectively covers a pandemic situation. So, with COVID-19 as a background, in the future, tenants may want to invest more negotiation resources into ensuring adequate protection in the event of a future event causing a similar global shutdown.

 Termination rights in contracts, leases and other legal agreements should also be given renewed attention. Termination for convenience clauses may warrant closer examination and the investment of resources in their drafting and negotiation will likely be well spent. Ideally, companies who may be committing to significant monetary investment in the provision of long-term service contracts may want to ensure that the right to exist the relationship upon certain triggers or contingencies is preserved. As many businesses have painfully come to realize over the past three months, unforeseen circumstances can dramatically reduce cash flow, and make prioritization of which agreements can be honored and which may need to be breached—even under threat of litigation—necessary.

 Likewise, providers or products and services should assess how to best position their businesses for success with customers from both a financial and good will perspective. While pushing to lock customers into long-term commitments may be ideal financially, providing an early termination option can go a long way towards strengthening that customer relationship for the long term. Further, utilizing early termination fees can alleviate and of the potential risk while still appearing on its face as beneficial to the customer.

Insurance Coverage

 The general consensus is that traditional business policies do not provide reimbursement for losses caused by a pandemic, and COVID-19 certainly would not be specifically anticipated. Likewise, moving ahead, it’s unlikely that the next significant health event will be specifically predictable. However, in light of what we’ve learned and experienced from the COVID-19 outbreak, insurance companies will no doubt begin to explore new product offerings that may benefit business owners. Likewise, business owners should use this opportunity to assess their current coverage and determine where potential gaps in coverage or abnormal risk exists. Riders to existing business interruption policies to cover for future pandemic events are likely to be developed and marketed by carriers, and new products may fill gaps in risk reduction that COVID-19 has exposed. As it stands, every business owner should nonetheless be looking into existing policies to see if losses due to COVID-19 may be covered in whole or in part.

Business Succession Planning

 No matter how grim, COVID-19 has amplified the reality for many business owners that they are an illness or injury away from leaving their business without any path forward or any plan for the future. Business owners should use this situation as an opportunity to review their business succession plans and emergency operations manuals. Determining a clear line of succession so order is retained is essential to any business that intends to have a life separate from its ownership or management. Operating Agreements, Shareholder Agreements and Corporate Bylaws should be reviewed to determine the effects an owner’s death or disability may have on the other owners and the business in general. What rights would a deceased owner’s estate have in the equity and management of the company? Does the company or surviving owners have an option to buyout the estate, and if so, will there be liquidity to do so? If not, a buy-sell agreement with appropriate life insurance issued on each owner may be worth looking into.

 Aside from the ability to ensure equity and control is placed in the hands the owners intend, businesses should have written disaster plans in place outlining the significant operations of the company, where important files can be located, how to access cloud-based accounts, etc. This is even more important for single member entities and sole proprietors who are so closely intertwined with this daily operations of the business who should give special consideration to who from outside the company would be charged with stepping in to either act as a gap filler while operations could be transferred to appropriate individuals or wrapping up the affairs of the company.

Business Model Flexibility

 The businesses hit the hardest by the pandemic are those that lacked the flexibility to respond. Brick and mortar retail establishments without an online presence, salons and personal service businesses, and restaurants without established delivery functions have been significantly affected. Likewise, there are numerous professional services that found themselves suddenly out of work due to a limited specialization. Civil and criminal litigation attorneys who rely on access to the courts have had their businesses put on pause as government operations screeched to a halt. Family law attorneys saw new clients dry up as couples put the brakes on splitting during a pandemic. Accounting firms specializing in small businesses initially saw an uptick in work navigating the government stimulus programs, but since, are dealing with a clientele that can’t even open for business in many places throughout the country.

For those businesses, assessing how to incorporate complementary products, services and businesses models into existing established revenue streams will reduce the risk of a singular even effecting their business in the future.

Risk Management

COVID-19 has forced the country to rethink the way in which many activities of everyday life are conducted. The “New Normal” going forward presents businesses an opportunity to assess what they can do to ensure the safety of their employees and customers. Examining sanitary processes and screening processes and investing in employee education will reduce risk and enhance business reputation. Adopting new policies for sick employees and implementing protocols for dealing with high-risk customers should be standard going forward.