Natural disasters and extreme weather conditions are very real threats to businesses everywhere. This was made painfully clear last year when Hurricane Harvey slammed into Texas, followed shortly by Hurricane Irma in Florida, and Hurricane Maria in Puerto Rico. These storms were among the most expensive in history, causing hundreds of billions in damages.

Extreme weather events seem to be on the rise and will continue to take a toll on communities and businesses. The risk to acquirers and lenders is compounded. While their own functions may be directly affected, they must simultaneously navigate the implications the disaster is having on their portfolio companies. In diligence, determining if the natural disaster is truly impacting earnings must be validated and that negative performance is not due to inherent, ongoing business factors.

That’s why it’s essential for acquirers and lenders, as well as their portfolio companies, to take the necessary precautions to protect themselves and minimize the damage to their operations. Unfortunately, too many businesses do not.  In fact, one in four small to midsized businesses hit by a major storm never reopens again, and 84 percent do not have disaster insurance, according to the Eastern Kentucky University Department of Safety, Security, and Emergency Management.

What’s more, whether it is an earthquake in Japan or a massive hurricane in Texas, the damage is not limited to companies in those geographical regions. With businesses today operating within a global supply chain, even a natural disaster that occurs halfway around the world can have serious consequences for firms and their portfolio companies.

Assess the situation

Gather as much information as possible about the ways that your firm’s portfolio may be affected. As soon as possible, try to contact the companies in your portfolio to understand the damage they sustained and the impact the event may have had on their business. Keep an eye on the general status of the affected area as well. Take note of recovery efforts, disaster declarations, and current conditions. The more information that you can obtain, the more knowledgeable your decisions will be in moving forward.

Lend a helping hand 

Provide any helpful information that you can to the companies in your portfolio. The success of their recovery is not only vital to your success, but also to the larger recovery of the area hit by the disaster. Advise companies to keep meticulous records of any recovery expenses they incur, as well as economic impacts of the storm. These records will help companies apply to recovery programs as they become available. Remind companies to review their flood insurance policies and to begin filing their claim. Accessing quick financial aid can help your companies overcome the disaster and succeed.

Have a supply chain strategy

Even if a company was not directly hit by a disaster, the nature of today’s global economy means that its supply chain probably was. This can result in a chaotic scramble to find new suppliers and lead to production delays and product shortages. For instance, if a key supplier’s factory is flooded due to a natural disaster, how long can your portfolio company survive without them? If the portfolio company is forced to ramp down production, how will this impact its business and the future of its brand? It is vital to consider how long a particular supply may be unavailable and make contingency plans to lessen any interruption using alternative sources. Companies with a detailed response plan for potential supply chain disruptions will have a distinct advantage over competition.

Develop a long-term recovery plan

Try to predict the impact that the disaster will have on companies in your portfolio and the possible impact that future governmental recovery funding might play in long-term success of those companies. Specifics will vary from firm to firm, but using your judgment to create a specific plan for moving forward is integral to successfully navigating the disaster. Reassess and update your plan as new information becomes available.

Scout for new opportunities

Along with the many challenges that come with a disaster, there will also be new opportunities. Firms that can remain calm and take advantage of new opportunities that arise are positioned to help recovery efforts by providing portfolio companies with the capital they need, and to prosper as these companies succeed. Firms should try to assess the impact that disaster funding, recovery initiatives, and community re-growth may have on the economic landscape and look for promising opportunities to reinvigorate their portfolios.  

Insight

A natural disaster can dramatically impact the lives and businesses of those in its path. Acquirers and lenders will be affected based on the natural disaster and the makeup of their portfolios. It is essential to create the framework for re-establishing business continuity and recovery to ensure both earnings and cash flows are not impacted to the degree where they would affect covenants and the ability to service debt.