Retail Band

PPP Loan Forgiveness & making the most of the Cares act for businesses – Frank Kaufman – Moss Adams – EP 46

“Once you receive the money, the clock starts. If you spend the right amount of dollars and the right bucket, there’s a possibility that the entire loan will be forgiven.”

Have you applied for the PPP fund? Did you know there’s still time for you to apply? But wait, before you apply, there are some things that you need to keep in mind.

In this episode of the Page One podcast, Luke Peters sits with Frank Kaufman as he talks about the PPP fund and all that you should know before and after applying and whether you will be forgiven or not.

Frank is the retail national practice leader at Moss Adams and chairs the firm’s Paycheck Protection Program Technical Resource Group. He has been serving clients in the Retail and Direct to Consumer channels since 1983.

Listen in to learn about the PPP forgiveness and the mistakes you could be making in that process.

Key Takeaways:

  • When the PPP fund is forgiven and the time it will take to start repaying if it’s not.
  • Understanding the law behind the PPP fund.
  • The elements of the buckets of PPP fund forgiveness.
  • Why you need to go apply for the PPP fund if you haven’t already.
  • Understanding the 11 months loan forgiveness process.
  • How you can use your PPP fund for the liquidity of your business.
  • Other programs aside from the PPP that you can apply for a loan from.

Episode Timeline:

  • [0:30] Intro
  • [3:02] He explains how different retail businesses his company represents are performing amid COVID-19. 
  • [4:30] He describes Moss Adams- their span and whom they serve.
  • [7:05] He explains in detail why the Paycheck Protection Program (PPP) has delayed.
  • [9:01] Why you need to be smart in how you spend your PPP fund which can either be forgiven or the time you need to prepare before starting to pay it off.
  • [11:54] Understanding when taking the PPP loan money can lead to breaking the law and where you get protected.
  • [14:57] The two buckets that are considered when it comes to forgiveness.
  • [16:27] The missing elements that are not too obvious in the two buckets of forgiveness. 
  • [19:32] He explains the methodologies that you can use to calculate and help impact your forgiveness amount.
  • [20:57] How you can count employees that did not come as though they came back.
  • [23:18] He mentions some of the common mistakes that borrowers are making that could hurt their loan forgiveness process. 
  • [26:05] How the PPP money can become an equity contribution to your business if forgiven.
  • [28:48] He describes ways in which you can improve your company’s liquidity.
  • [31:25] How the digital economy and fear of losses from banks is going to affect how investors will view businesses in the future.
  • [33:50] The changes in the investment’s patterns now and in the future due to the COVID-19.
  • [36:28] He mentions some other programs that you can apply to aside from the PPP or even if you get it.

Podcast Transcription

Announcer: Welcome to The Page 1 Podcast, a podcast featuring a variety of guests and thought leaders on topics ranging from digital marketing, sales channel strategies, influencer marketing, best-in-class product launches, and all the details about how to accelerate sales. Now here’s your host, Luke Peters.

Luke Peters: Thanks for joining us on The Page 1 Podcast. I’m your host, Luke Peters, CEO of NewAir Appliances and Retail Band digital strategy agency. We’re now in a coronavirus world, and I know that’s on everyone’s mind, so I’m going to adapt to all of the interviews to ensure that you listeners are getting the most out of this podcast. You can expect us to get right to the point, and quickly, business owners, how are you digital sales performing right now? I’m sure they’re doing good, or hopefully they are, and if you do need some help, if you wish you had somebody to come up with a strategic plan and grow your online sales, that’s what we do at Retail Band. If you want to learn more, just find me on LinkedIn or email me

Luke Peters: In this episode, you’re going to learn from Frank Kaufman on how to ensure that you properly get forgiven on your PPP loan. Yes, I am interviewing an accountant, and we’re going to be talking about all of these accounting things, but right now, I know for business owners, this is front and center. It’s so important. PPP is huge. We’re also going to touch a little bit on M&A, financing, strategy implementation.

Luke Peters: Frank is the retail national practice leader at Moss Adams and chairs the firm’s Paycheck Protection Program technical resource group. He has been serving clients in the retail and direct-to-consumer channels since 1983. Frank represents several hundred clients with years of experience in M&A, financing, reorganizations, and strategy implementation. Frank interestingly is a graduate of Cal State University of Long Beach just like myself. Frank, I bet you didn’t know that. We have something in common there. Great to have you here on The Page 1 Podcast.

Frank Kaufman: Hey, Luke. Great to be here. I didn’t know you were a 49er or a beach person, but there’s a lot of us out there. It’s good to hear.

Luke Peters: Just let the audience know, so Cal State University long beach is a little bit south of Los Angeles near the beach. The funny thing is, during the COVID lockdown, we actually… My daughter, she’s not going to that school. She got accepted to a couple of other schools and is going to a different one. But anyways, we went over there just to check it out. It’s a beautiful campus to walk on. It turned into a fun day out because everybody’s been on lockdown. This is like a month and a half ago, and there weren’t too many people on campus. We had a good time with the kids and stuff, but it’s a beautiful campus. Cool that we have that in common.

Luke Peters: Frank, you got a ton of experience, so thrilled to have you on the show, and thanks for making the time. Why don’t we start with coronavirus and how it’s impacted. Obviously, you’re working with a lot of clients, and I know some it’s impacted positively and some negatively, but what are you seeing? Maybe a specific story would be interesting.

Frank Kaufman: Yeah. I will tell you a few things. One, as you mentioned it, most of our clients that are primarily digital-based commerce businesses have seen upticks, a pretty substantial one, and the ones that are in the wholesale, retail, bricks and mortar, if you’re an essential business, you’re doing well. If you don’t fit in those buckets, it’s survival right now, and it’s very, very tough.

Frank Kaufman: Fortunately, the PPP funds are around. Interestingly enough, we had one client that started going down the path of a beauty business and in March decided, “The beauty factory can also make hand sanitizers,” so they have completely exploded in the last, well, April. I can’t mention numbers, but insane numbers for April, May in their backlog in the hand sanitizer. We all need that, and they feel like the new normal will keep that in play, but worse things come out of this world.

Luke Peters: Well, those are the best stories. I had another guest, and her business, Words with Boards, and she transitioned into making a face mask during this pandemic because they have all the cutting equipment, so it’s great when people can pivot. For those that can’t pivot, and obviously, you guys… By the way, actually, before I get to this question, I mean, Moss Adams, you guys are a huge firm. Do you want to quickly just give the audience a little bit on just size of the firm and geography and so on and so forth?

Frank Kaufman: Sure. Moss Adams is about a 2,500-person firm headquartered in Seattle, based primarily in the western half of the US as far as our footprint, but we serve clients not only the US but internationally. I think we’re in the top dozen if you were to rank firms worldwide.

Luke Peters: Great. Thanks for that. You guys, saying it for the audience, Frank’s touched on so many different things, but anyways, it’s interesting when clients are able to pivot, but not everybody is, so is there anything specific… like obviously, companies that are hurting are going to have to do cost cutting, but have you seen anything or do you have any interesting stories on how folks have been able to do that or survive besides just cost cutting? Are they doing something with supply chain or with AP or have they really just had to just go through the whole P&L and cut, cut, cut?

Frank Kaufman: Yeah. There’s a whole gamut of different things that you mentioned. We’ve had probably at least a half a dozen of our apparel companies become mask suppliers. Interestingly enough, they are turning lemons into lemonade. They, some extent, all had old inventory. Let’s say it’s a T-shirt. A T-shirt probably wholesales for, I don’t know, five bucks. A T-shirt can turn into five masks. That wholesales for $4 each. There’s not a lot of labor, so-

Luke Peters: Oh, wow.

Frank Kaufman: … [inaudible 00:05:51] old inventory and quadrupled profits, and at the same time delivering something that all of us needs, so that was pretty interesting and fun to watch.

Luke Peters: That is pretty cool. Why don’t we get right into the PPP. I know this is front and center, a lot of business owners. I guess we can start with… What I want to really do is we’re going to get into the value, which is let’s make sure that the listeners here on The Page 1 Podcast are getting as much forgiven as they legally can. But before we get to that, there is some interesting history on this PPP. You and I were just talking before the show here and talking about the delay in…

Luke Peters: We had a slight delay in when we received our loan as well. I think it was a couple of weeks. During March, it was a really dark time for pretty much every company because there was a time when the market just tanked, and we just… People didn’t know what was going to be left in a couple of months with everything shutting down. Even though some companies are doing well now, it’s still really uncertain in the future. But anyways, going back to that timeframe, you mentioned why there was a delay, and if you don’t mind quickly sharing that with the audience and just starting off how this PPP process started.

Frank Kaufman: Okay. Sure. First off, the CARES Act was passed on March 27th, and I think it was 850 pages. In there was the portion addressed called what we refer to as PPP, but the name is Paycheck Protection Program, and the name’s important obviously later. But the idea was it was going to be an SBA loan, and it was going to go through the banks. The SBA was going to guarantee 100%, which is different than their normal programs, which are about 85%.

Frank Kaufman: The banks were getting real big pressure to get the money into the marketplace right away, but what most people don’t understand the guarantee is good as long as the bank does their job, and their job typically is at least a 30-day diligence process to make sure the application is it is what it should be. If, in fact, the bank messes up in that diligence process, their guarantee goes away, and the bank is at risk.

Frank Kaufman: The banks and the SBA were negotiating for about a week until he SBA said, “It’s unfair for us to expect you to get money in the marketplace and do your normal diligence process, so you are off the hook as long. As you’re taking in the information and looks reasonable, you don’t have to do the normal diligence.” That actually costs about a week getting money into the hands of the public, but that one actually we’re over now, but that was an interesting stress point at that time when people needed the money very quickly.

Luke Peters: Yep. Exactly. Now bringing it up to current times, some folks have received this money. What’s next? What should they be planning for? I think on the surface, it seems pretty obvious on how we should handle the loan and to properly use it like it was intended to, and then the percentages or calculations on how to get it forgiven, but I guess at this time in point, what’s next, and what should folks be thinking about?

Frank Kaufman: Sure. Okay, so basically, what happens is once you received the money, the clock starts ticking for the next eight weeks, and it’s looking at what dollars you’re spending. If you spend the correct dollars and the right amounts and the right buckets, there’s a possibility that the entire loan will be forgiven. If it’s not, if it’s not, know this, that the loan is… there’s a six-month moratorium, so from the date you received the money, you wouldn’t have to start paying anything back for six months. Then you have up to two years to pay it back, and it’s a 1% interest.

Frank Kaufman: The funds, outside of the forgiveness part, they’re pretty darn competitive, but the idea really now is to understand the formula of how forgiveness works, a couple of buckets things fall into, and the levers you have that at your disposal to pool to maximize the forgiveness because there’s certainly a misconception out there, “If I got PPP funds, it’s all forgiven.” That’s not the case at all. You need to be smart about where you’re spending the money.

Luke Peters: Okay. Also, for the audience, just so you know, Frank was kind and thoughtful enough to prepare a deck. I’m going to include that. It’s too much to talk about here on the podcast. It’s going to be on the website, on the website, probably as a blog. We’ll have this in the show notes as well linking to it. If you go to the Retail Band podcast page, and you’re on the show notes, we’ll have a link as well. I’ll have portions of that deck on there showing you guys because there’s a lot more details than we can even explain or then Frank is going to have time to explain here, and in true accounting format, this thing’s like 25 pages long or some crazy amount. I went through some of it quickly, but I’ll try to condense it and put it in there for the audience. Frank, why don’t we just… moving through this.

Frank Kaufman: As of today, there’s about 50 frequently asked questions and responses through the SBA in about 60 days, so when Luke posts that on there, I think it has today’s date, understand that there will be, not that there can’t be, there will be changes post, so you need to… Digest it now, that’s fine, but you got to stay up the day because things are happening constantly in the interpretations of law both from the Senate, the Congress, the treasury, and certainly the SBA.

Luke Peters: Well, that’s a great point, and actually, so we before I get to the next question, there have been some folks that say, “Don’t take this loan because it’s not going to be forgiven and you can’t trust the SBA,” and all this kind of stuff. I mean, there’s a few prominent people that have said this that I’ve heard, but it does seem… I know there’s been some changes and fluctuations in how this thing has been rolled out, but should folks be confident that they can trust the initial… as long as they follow the rules, that that portion will be forgiven. What are your thoughts on that?

Frank Kaufman: What happened… I think we’re up to like frequently asked question number 48, but there was an infamous number 31 that came out and said something on the order of “if you took money and you had other sources of liquidity, you should pay it back or you’re going to be subject to criminal prosecution.” For about two weeks, it got really intense for people where, “Wait a minute, I’m following the rules, and now I’m a criminal.” It was intense. There were subsequent addressing of that.

Frank Kaufman: Now, the deal is, for one, should you have taken the money? The SBA came out and said, “Look, if your loan is less than $2 million, we are going to deem, by the fact that less than $2 million, that you were acting in good faith,” meaning not necessarily that you get to keep the money, not necessarily that it will be all forgiven, but the whole idea of criminal prosecution and all that other stuff isn’t going to happen.

Frank Kaufman: If it’s above 2 million, for sure you’re going to get audited, and if upon audit you’re going to be deemed to have not taken that money appropriately and if you give them money back at that point, you are also off the hook. That’s one big thing to understand because there was a time where everybody was very, very concerned they shouldn’t have taken money.

Frank Kaufman: Now, there are entities and very highly publicized entities, a lot of public companies… Harvard had taken money, and they got a lot of criticism and gave the money back. The Los Angeles Lakers took money, gave money back. There’s a public profile that you should be aware of. Every company that takes funds, the name of the company and the amount of the funds taken through this program are known, so if that has a negative impact to your organization, you may want to consider giving the dollars back.

Frank Kaufman: But assuming you’re not in that ballpark, there’s reasonable expectation if you follow the rules that you will be able, depending on your personal facts and circumstances, to get forgiveness. I alluded to this thing before, PPP, Paycheck Protection Program, that means the government want it [inaudible 00:14:05] employers of the world, especially the fact that half of the employees in the US work for small business, they didn’t want… there’s a ballooning of unemployment, so the idea was, “We’re going to give employers money, small businesses, and they’re going to give it to their employees, and frankly, whether they work or they’re furloughed, we still want them to give them the money.” That continues the paycheck protection. It’s not about helping the company out. It’s not about helping the company be more profitable. It was to continue for those people to receive funds. That’s really the spirit, and that also defines where you’re supposed to spend the money.

Luke Peters: Got it. Talking about that, I mean, I guess that can be where we go next is how are folks allowed to spend these funds? I mean, from what I understand, you spend it payroll, I think rent, I think insurance, and then there might be another category. Are those the main areas?

Frank Kaufman: Yes. As you come to the forgiveness amount, there’s two buckets. The first bucket is where are you spending the dollars. There’s currently a rule, we talked about 75/25 rule, which says what’s considered payroll to be the amount that you spend on, quote, “payroll” will be at least 75% of your forgiveness, and payroll is defined as cash compensation. It also includes healthcare benefits, also includes 401(k) matching. That’s your basic payroll.

Frank Kaufman: Then there’s another bucket, which is the 25% bucket, and the 25% bucket is generally rent, head, and utility and couple of other minor items that fall in the 25% bucket that is forgivable. The other item in there is mortgage interest. Then there are other pieces that fall in the 25% bucket aren’t forgivable. We don’t have to get in the details, just know the rules really complex.

Luke Peters: Yeah, and speaking about that, so I think on a surface, most business owners understand that basic 75/25, “Okay, let’s follow the rules, make sure we document, document, document, and spend it for these things,” but what are maybe three important things to consider or a couple at least that folks may not be thinking about, and these three things would ensure that the loan is, more of it is forgiven or all of this forgiven. What might be those missing elements that are not so obvious on the surface?

Frank Kaufman: Right. What I talked about so far is the buckets of money where you can spend the money, but that just equates to what your maximum allowable forgiveness amount is. Let’s just say you get had a $500,000 loan and you spent $500,000 in the next eight weeks in the right categories. That means you could get $500,000 forgiven; however, what you get forgiven is that maximum amount multiplied by reduction percentage, and the reduction percentage is based on your head of payroll over your eight-week post-funding versus a couple base periods, so if oversimplifying, if you had a half a million dollars that you thought would be forgiven based on what you spend, but your number of full time equivalent over the eight weeks was half of what had been in into the prior period, you’re only going to get 250,000 forgiven. It’s two pieces, and you have to know each piece and how you spend.

Luke Peters: That is, just to clarify, even though in that example where they actually spending 500 on payroll, but you’re saying they’re not going to be forgiven 500 because in a previous period, maybe their payroll was a million. Is that kind of what you’re saying, because the percentage of payroll has gone down or-

Frank Kaufman: No.

Luke Peters: Okay.

Frank Kaufman: It’s dollars. Let me try to explain it. Sometimes, we do this visually because it’s easier to understand. But let’s assume for a minute, like you said, the first part, you spent $500,000. Your loan was 500, and you spent all of it in the appropriate categories. Not all of it has to be a payroll, but 75% is in payroll. The rest is in the other category, so you spent 500 grand. That’s great.

Frank Kaufman: However, there is calculation that’s done that has nothing to do with it dollars. It has to do with people, head count. If you receive the funds on, let’s say, I don’t know, April 15th, you got your money. You go the next eight weeks, and during that period of eight weeks, it’s determined that you had full time equivalence for that eight weeks of 60 people, and they may look at one of two base periods, one is the first 60 days of this year and one is basically most of the first half of last year. You compare. Let’s say the lower number there was a hundred. Your base period’s a hundred, and you’re only employing 60 during this window, that means you’re only going to get 60% of the maximum dollars, so 60%-

Luke Peters: Got it.

Frank Kaufman: … 500, now you are forgiven 300. The other 200 is now the loan that you have to pay back over the two years.

Luke Peters: Okay. No, that is actually kind of what I was thinking. That is, I guess, if folks made cuts before the PPP and the folks that put this plan together wanted you to hold on to everybody, and so they’re kind of comparing to an earlier, even if it was an earlier timeframe this year. Is that based on… So it’s not based on dollars. It’s literally just based on number of full-time employees. It’s just each employee, and then you come up with a percentage of where you are now compared to what your employment quantity was, say, in a previous period. Is that how this formula is put together?

Frank Kaufman: Yeah, so up until May 14th, everybody deemed at a full-time equivalent was somebody that worked at least 30 hours because most of the other payroll laws identify a full-time person is 30 hours and more. The SBA came out and said, “No, it’s 40 hours,” and so now, everybody’s recalculation base periods and things has to change to 40 versus 30.

Frank Kaufman: There’s a couple of different ways you can do that. One is, for people that aren’t 40 hours, you can assume they’re all 0.5 full-time equivalent across the board, which some cases that works if you have a lot of people in your workforce working 12 to 20 hours a week. Other methodology being, let’s say, if you have somebody working 32 hours a week on a 40-hour week, that’s .8 of a person, so there’s all different kinds of funny ways to, I guess, calculate or approach it, but some of the options, you select option A versus option B, it can seriously impact and help maximize your forgiveness amount.

Luke Peters: Yeah, no, it’s super, super interesting by the way. Any other… because that could make a huge difference if people have staffed down before and after… even if all of the funds are going into the 75/25 buckets, it could make a huge difference on what is forgiven. Anything else stand out like that, that folks may not be thinking about?

Frank Kaufman: Well, absolutely. There’s a couple of safe harbor things that came out, which are pretty interesting. One is of… This apply applies to individuals that were furloughed between February 15th and April 30th. If you let people go and they’re furloughed and you bring them back by 30th, you hire somebody and they come back on June 29th and they’re now an employee again for you, they count. There’s not really much in the way of dollars that they’ve been paid, so the first bucket of dollars isn’t going to change; however, they count as if they were an employee the whole period, so instead of losing a full-time equivalent, you have added that person back. That’s huge.

Frank Kaufman: Then even more interesting thing that’s happened, as we know, one of the programs, the federal government is adding 600 bucks a week to unemployment, state unemployment, so unfortunately some companies are trying to hire people back, and they’re getting responses is that are, “Well, you know what? When my unemployment runs out, maybe I’ll come back, but right now, no, thank you.” If you get that, if you get that response, you document your offer, you document the response, you get to count them as if they came back even though they never did.

Luke Peters: Frank, I’ve heard that exact situation happen where people won’t come back. I’ve never actually heard this explained that way, so that’s really interesting information. I’m sure it affects a lot of service businesses. I heard it’s happening a lot with salons and in other businesses where the unemployment payments were competing with what folks were making in those jobs.

Frank Kaufman: Yeah. The one other thing I’ll mention is that if that occurs, I believe it’s 30 days that the employer has to notify the SBA [inaudible 00:22:40] sorry, not the SBA, but the unemployment agencies that you have offered them a job because, as you might imagine, the unemployment agencies aren’t real happy about this concept of being offered your job back and they say, “No, I’m just going to take money and not work.” There’s some burdens on the employer to communicate that, and there’s a notice on behalf of the employee that they need to be careful about their choices.

Luke Peters: Makes sense. Then I guess similar question, but maybe on the same theme, but are there common mistakes that borrowers are making that might hurt them if they don’t have second set of eyes looking at this?

Frank Kaufman: Yeah. Probably the most common area is, there is a cap to the dollars around payroll on an annual basis that is over $100,000. If you are receiving funds above that, you need to make sure that you only counting the funds in this eight-week period. I think the number is something like $15,385 is the maximum per person. You also need to be careful because if you pay out bonuses in a two-week window there, that could skew the numbers to make somebody look like they’re getting more than 100,000, so there’s a lot of tricky rules, so to speak. My suggestion is either get with somebody that spent a lot of time with a team doing that or then a lot of things yourself. The SBA form, the forgiveness form to apply for forgiveness is a two-page form with nine pages of explanations. That might tell you that it’s a little confusing.

Luke Peters: Yeah. For most business owners, that’s generally not the best reading for us. Not our area-

Frank Kaufman: No.

Luke Peters: … of expertise. That’s funny.

Frank Kaufman: One other thing I should point out, Luke, and I don’t know if people are… but it’s a big deal. If, in fact, you haven’t for the funds at this point, feel free to go ahead and do so. The first chunk was $349 billion, and it disappeared inside of, I don’t know, maybe a week. The second chunk, a 310 billion, about half of that… I think there’s $147 billion as of yesterday still available. You have until June 30th to get after those dollars, so if you haven’t applied, go get the money if it fits you because it’s, like I said, good shot that you could be forgiven, and even if not, pretty interest money.

Luke Peters: Well, that is huge news right there because, you know… and we were talking previously about a business that was rejected on the loan for no good reason, probably just a paperwork issue, so any folks out there listening who haven’t gotten it and really need it, good news that you got plenty of funds left. Frank, just in the intro, we talked about that we would jump into a couple of other areas, and I’m sure you have tons of experience in M&A and a few other things, but what are common, well, actually, uncommon ways, but maybe the best ways that companies can increase their liquidity right now during this crisis? I know liquidity, anybody who’s working with a bank, liquidity is front and center on business’ minds and also on their bankers’ minds. Obviously, there’s a lot of things companies are doing with AP or just trying to get more profitable or increase liquidity maybe by leaning out inventory or one way or another, but does anything else come to mind or a crafty way that companies are improving their liquidity right now?

Frank Kaufman: There are. Before I move completely off of the PPP because there’s just something here that helps in that question as well.

Luke Peters: Sure.

Frank Kaufman: The banks that are doing this, in one respect, are happy because it’s not a risk to them because they’re going to get paid if, God forbid, the company defaults, but as you know, when you were applying for the PPP funds, you went to your existing bank, and that was because you got this know your customer program that they wanted to go through before they get money out. It’s very important.

Frank Kaufman: Odds are, you already have a loan at that bank, and so if, in fact, the loan is going to get forgiven, and you can demonstrate to the bank why that’s the case, basically, that money, and there is a tax impact, but that money net of tax becomes like an equity contribution to your business, and so your bank covenants are easier to meet, your leverage is easier to meet, and that may allow you to get more leverage out of your existing bank just knowing that. That’s within the PPP program.

Luke Peters: That’s a big deal, by the way. Before you go on, how… because I’ve heard it both ways, and some banks are not interested in counting that yet until it’s forgiven. What’s the key differentiator there, or is it just kind of dependent on the bank?

Frank Kaufman: Right. First of all, [inaudible 00:27:26] a little bit on the forgiveness process, eight weeks, and then the company has actually up to four months to apply for forgiveness, and then the bank two months to determine whether or not they think you should be forgiven. Then if they think it’s forgiven, then it gets submitted to the SBA, and there’s another three months.

Luke Peters: Oh, wow.

Frank Kaufman: If you think about it two month, four month, two month, three months. It’s 11-month process. If you can share with the bank your calculations in your analysis, it’s helpful for them when, in fact, the forgiveness, the actual notification could come almost a year out. That’s important to know. The bankers are dealing with a full range of customers, some that think, “Well, I got the money, so it’s forgiven,” and some that they’re very astute on the rules. If you put yourself in the second bucket of being able to communicate to them, it will help you with your existing bank.

Luke Peters: Great advice. Okay. Cool. Thanks for that. I guess from there, we were talking about improving liquidity, and it goes hand in hand with these times. It’s more about COVID and companies struggling and having to really make sure they’re going to survive, and to survive, you got to have liquidity and just your thoughts on what are maybe unusual or different ways or any stories you have on how companies have improved their liquidity position.

Frank Kaufman: Yeah, so I would say if you’re a… Let’s say you’re a bricks and mortar retail. You may be completely shut down hoping to open up soon. Decades before, unfortunately, I was the accountant for several creditors committees when people are trying to restructure, and the only way you could restructure your leases was going through a Chapter 11 process where you’re a little more in control.

Frank Kaufman: Today, the world’s different, and so there’s a lot of communication directly with the REIT, the landlord, as far as what they’re willing to do. Most are willing to enter into some kind of agreement where it’s not rent forgiveness, but it’s deferral, which at least in the interim is helpful, but when you’re negotiating your rent, you’re probably feeling you’re paying as much as you can pay. If in the coming months, you have to pay that plus making up the gap that you’ve deferred, it’s going to be tough, but there is, I guess I’ll say, a lot more informal reorganizations going on on the rent side.

Frank Kaufman: On the supply side, boy, it’s working with your vendors and trying to get them money, trying to be communicative how your business is going. I mean, if you are a digital business and your volume is up 20% and you’re buying more from them, they’re going to have a hard time if you say, “Hey, I need a payment deferral.” I don’t think that’s realistic. But if it’s the other way around, you’re working with them and like, “You got it product in the supply chain that I haven’t taken yet. If we work this together, we’ll find a way over time to work all that stuff through.” Maybe we’re not… I guess I’ll say there’s more carryover product with companies that tend to be very seasonal. They’re trying to find a way to carry product to the next year and help everybody out.

Luke Peters: Great for that. Thanks for that. You also have a lot of background in M&A, and that’s always an interesting topic and valuable for the audience here. I guess what I wanted to ask you is also you’re involved in company audits and making sure that the books are correct and helping companies with their accounting practices. Combining those two, what are things that companies can do to make sure that they appeal more to an investor for an M&A transaction, and kind of looking at it like, obviously, they want to increase their profitability and things like that, but is there anything else that stands out? It could be something on the balance sheet or even something that’s specific to these times in COVID that makes the company more attractive?

Frank Kaufman: Well, I think there’s a general perception. If you look at the retail sales mix, you’re talking about somewhere around 12% is the direct-to-consumer, the digital economy. I’ve heard estimates of anywhere from 18 to 25% is what the new norm’s going to be. It’s just a more efficient model, and there’s going to be a lot of challenges in the bricks and mortar, so I think one of those, the big shift, is going to understand that you’re going to be moving. A lot more business is going to be done that way, so with respect to the buyers, they’re going to look, and if you’re in that bucket, they’re going to assume whatever you’re doing today, other than the in-between blitz, but long-term, you’re going to be in a higher growth than you ever have been. This is going to expedite the [inaudible 00:32:13] process. That’s a one real big [inaudible 00:32:16].

Frank Kaufman: One challenge is banks in general are, in my opinion, going into what I’ll say to most conservative lending arena. Most of the credit committees are worried about the losses that they’re going to incur, and so they’re not going to be putting the dollars out into the market that they would normally do. What that means is most private equity acquirers are not going to be getting the same leverage that they would like to or they have. If they put in a dollar, maybe they get two bucks from the bank. Well, maybe now, if they put in the dollar, they might get 75 cents from the bank, which is going to have downward pressure on purchase price. You should be considering that if you’re looking at liquidity event. Going to have a big impact.

Luke Peters: Wow. That’s super great insight right there and something that I would have never come up with. Of course, they’re thinking… I mean, there’s a great point in the digital sales side, and obviously, those companies are better suited for the future and in a way, almost kind of like… and it’s not the same multiples, but you want to have a SaaS component of the business if you can because those multiples are amazing, and now it’s kind of like the mini SaaS I’ll call is like if you have a direct-to-consumer component of the business, so good insight there, but the other one was really interesting. Does that mean that something that could come out of this over the next couple of years, is that the… I mean, there’s still a lot of dry powder on the sidelines looking for these investments, but you’re saying that the number of investments may decrease, or maybe it’s just more that there’s going to be pressure on the multiples on a go-forward?

Frank Kaufman: What I think, when business transact at very high values, it’s because you’re significantly different than the rest of the marketplace, and the story is there’s at least a three to five-year window where that’s going to continue, and so I do think that people are faring well through this. I mean, in the past, I can’t ever remember in any kind of deal, let’s say, Moss Adams Capital was putting together in the book did we put the term “our distribution channels are essential businesses.”

Frank Kaufman: Now that’s going to be one of the things that gets checked. It’s like, okay, well, God forbid something happens and we go into this process again. If you’re not direct to a consumer, all right, are you selling to Walmart and Target? If you are, wow, your business is going to pick up. If you’re selling to it, call it, mom-and-pop boutique, I don’t know what’s going to happen. That’s another a caveat.

Frank Kaufman: The other thing we’re seeing, which is interesting, it goes back to this PPP loan because some of these loans are $10 million. If you are in the middle of this transaction, and you have a $10 million PPP loan that might take 11 months to figure out if you’re going to forgive or you’re not, there’s a big contingency escrow or question around purchase price. That’s another reason why you want to go through this analysis. But it’ll be interesting. I think there were more dollars in the marketplace than companies that were being able to be transacted, and now, it’s even more so the case.

Frank Kaufman: It’s going to be pretty interesting on the M&A. Currently, right now, deals that are closing are ones that are already like 95% down the road and don’t have a significant impact from coronavirus or that had an uptick or there’s bottom fishers out there that are trying to take advantage of, well, people who are in tough times, and so unfortunately, some businesses are falling by the wayside in those scenarios.

Luke Peters: It makes a lot of sense. We’ve talked about a lot of different things here, gone deep into PPP, and hope to finish it up on this question. You’ve been a great resource so far. On the same note as PPP, but besides that, I mean, there’s other programs. I’ve heard of some smaller SBA programs. I think one of them is like a $10,000 loan, but it had to be… or it required some sort of other guarantees that didn’t seem as interesting, but beyond that what other government programs should business owners keep an eye out for?

Frank Kaufman: Yeah, so there’s a few things. I think the $10,000 thing might have been the EIDL, which was the Economic Injury Disaster Loan, which could have been more, and everybody who applied would get maybe 10 grand that was forgiven. Frankly, even if you applied for a million bucks, I don’t know of anybody that’s got more than the 10 grand. That was actually started before PPP.

Frank Kaufman: At this point, if you’re in the agriculture business, you can ask for that money; otherwise, nevermind. With respect to… I’m seeing some people go to commercial lenders, not the traditional banks, and there’s a higher interest cost, but sometimes the liquidity is what you’re looking for. There are some programs, one of them, or a couple of them, actually, if you didn’t do the PPP loan, there’s something called an Employee Retention Tax Credit. You can get up to $5,000 per person, which is based on 50% of their salary. For everybody that you employ, it’s a tax credit that you can get.

Frank Kaufman: Another thing that you can do, whether you have the PPP or not, is you can defer the FICA portion of the employers, so if you’re making deposits on a payroll tax, you’re the employer, the part that you put in for FICA, you can stop depositing that through the end of 12/31/2020, and whatever that amount is, you would pay half of it at the end of 2021 and half of it the end of 2022. The only caveat is that deferral of money stops if you get the formal notice that you’ve been forgiven on the PPP. It doesn’t mean you have to pay it back then. You still pay it at the end of 2021 and 2022, but that weighs into some people’s decisions as to whether they’re going to apply right away on the [inaudible 00:38:19] first day or they’re going to wait 120 days before they apply.

Luke Peters: Cool. So much to digest here. It’s great that it’s podcast format so you guys can all rewind and hear those last couple of bits again. Of course, we’ll have show notes. I’m going to have a Frank’s deck. We’ll have that on the website. Then Frank, I’m sure listeners might be interested in contacting you or learning more about how you can help them. What’s the best way to get a hold of you?

Frank Kaufman: Very, very easy, frank.kaufman, K-A-U-F-M-A-N, or if you just can remember and you look under Retail, you’ll see me. I have no problem, my cell phone is how I live, that’s 949-933-9646. I’m happy to help with any of those listeners.

Luke Peters: Well, thanks, again, for that, Frank. We’ll have all that in the show notes. I just want to thank you again for being a guest here on The Page 1 Podcast and sharing your valuable knowledge with our audience. Really hope everybody benefited from that. Thanks, everybody, for listening to this episode of The Page 1 Podcast sponsored by Retail Band. Hope you enjoy the interview today. Truly appreciate your reviews on iTunes, and hope you join us for the next interview.

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