Scott Mlyn | CNBC
Investor Kevin O’Leary knows firsthand the challenges entrepreneurs on Main Street face during the coronavirus pandemic. Many are struggling to survive the economic deadlock and the rapid transition to the digital economy.
“Twenty percent of the small private companies in my portfolio are going to fail,” he said on CNBC’s mid-term report. “They go to zero. They are restaurants. They are into sports and entertainment … I don’t want to support them anymore, nor do I think the government should.”
He is referring to the Paycheck Protection Program, which was approved under the CARES Act introduced earlier this year to help small business owners meet payroll and keep their businesses alive during the health crisis. The application process ended on August 8th. To date, PPP has granted US small businesses, supporting more than 51 million jobs, 5.2 million loans valued at $ 525 billion. Right now, talks in Washington to give Main Street additional incentives under the program are stalling as Democrats and Republicans question their strategic interests weeks ahead of the presidential election.
The “Shark tank” The investor said he believes companies are facing a difficult path due to changed consumer behavior. He found that the way people use digital for shopping, health care, education, remote working, and so many other daily activities has fundamentally changed. O’Leary started his first business in his basement in 1986. In 1999, O’Leary and his co-founders sold the company to the Mattel Toy Company for $ 4.2 billion. He has had several hits since then. In addition to invest in successful companies Through ABC’s “Shark Tank,” O’Leary founded companies such as O’Shares ETFs, O’Leary Financial Group and O’Leary Wines.
In addition to being successful, O’Leary has also seen some failures which is an important lesson for entrepreneurs.
“We have accelerated a digital transformation that should have taken five years in five months,” he said. As a result, it’s been a very, very volatile time for all types of businesses, “he said at a recent CNBC virtual summit on the Small Business Playbook.
Companies that will survive can successfully adapt to this new digital economy, he predicted. They also need to know how to communicate and sell directly to customers – and how to manage their finances. “This is the time to stay focused. And don’t let the noise or naysayers get in the way,” said O’Leary.
What is the biggest mistake entrepreneurs make that threatens their company’s chances of survival?
It’s taking on too much debt, according to O’Leary. “You have to be very, very confident that you can survive for the next 18 months before you do this. When your sales have gotten to zero and you have no income and you and you have no chance of income because you have a bar or Being a restaurant that is about to close is not a good idea, however, if you are generating income from performing the digital pivot and believing your business can survive, using debt on interest rates can work, and prices are at all-time lows . “
“The biggest problem is when things don’t go right,” says the Shark Tank investor. “So, if you have a debt right now and you can’t pay it back, you are technically bankrupt.”
“Raising government bailout funds is not always a good idea if you think your business will not be profitable in the long run because consumer buying behavior has changed,” said O’Leary. “I think if another government loan package comes out it won’t be free helicopter money like the original PPP programs were. You have to be very careful and evaluate the terms of those loans.”
How much debt should you be willing to take out if it is right for your business?
“Use this simple formula: never use more than a third of your company’s free cash flow to service debt. That includes principal and interest payments. That’s the magic number.”
According to the small business expert, the moment you exceed that amount, you are putting tremendous pressure on your business. “You can’t reinvest in the business by servicing debt. You don’t have free cash flow to attract new customers. You can’t grow. That’s why it’s so dangerous.” O ‘said Leary. “It becomes a barbell of weight for you, and it’s very stressful. Sometimes it makes more sense to just let it go.”
As he points out, sometimes you have to hit the reset button and start over when there is more market certainty. “You have to realize that it is difficult and look for new opportunities.”