Israel’s Budding Entrepreneurs Hit a Coronavirus Wall

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A street of closed shops amid the coronavirus crisis in Jerusalem, March 18, 2020.
A street of closed shops amid the coronavirus crisis in Jerusalem, March 18, 2020. Credit: Emil Salman

This was going to be Shmuel Malul’s big year. After a long career as a professional soccer player he retired and with partner David Peretz leased a 100-square-meter (1,076-square-foot) space in Tel Aviv’s upscale Basel neighborhood. Together with others, they invested 500,000 shekels ($138,000) in renovating the site to house a workout place they named 100% Power Gym.

Everything was ready. The gym looked exactly as Malul had imagined. His dream of being the owner of a premium workout space was about to come true. Sixty people had signed up, reinforcing his feeling that he was dead-on in his conception of market demand.

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Then, about a month and a half after the opening, the coronavirus struck. At first Malul tried to fight back. “I kept looking for a formula that would allow me to open: Just one person would work out at a time,” he says.

“Unfortunately, I didn’t get authorization for that either. It was a real war of attrition .... The police showed up and told us that no activity at all could take place and we would have to shut down, and that’s what we did. I felt like I’d been punched in the gut.”

Shmuel Malul, co-owner of Power GymCredit:

According to the business plan, the partners were supposed to recoup their investment within three years. But no one took into account a total cessation of operations, or that the overwhelming majority of their clients, who signed up in response to a big advertising investment, would ask for their money back. “There’s a loan to repay, there’s rent that we have to go on paying, and when I look ahead I don’t see the end,” Malul says.

“No one is picking up the gauntlet of helping the self-employed. We’re trying to look after ourselves and not go off the deep end. We’re looking for ways to minimize the damage: We’ve stopped working with suppliers and we’ve called off the advertising, PR and branding. We’re coping with people who signed up and want a reimbursement, and we have to refund their fees.”

Time running out

Malul says he can survive for another two or three months. “I don’t want to think about it – to maintain a place like this for three months with zero revenues will throw me into chaos,” he says.

Next to the gym is Bubush – an indoor playground for kids with a snackbar – the handiwork of Meital Farjun and her sister, Oshri Outmezguine. It too is shuttered at the order of the Health Ministry, less than a year after it opened, and just when everything looked promising.

A year and a half ago, the two sisters decided to leave steady jobs – Farjun at El Al Airlines and Outmezguine at Rafael Advanced Defense Systems – and strike out on their own. Augmenting their small equity with a state-guaranteed loan, they invested hundreds of thousands of shekels in the new business.

Meital Farjun (left) and her sister Oshri Outmezguine, owners of Bubush Credit: Oshri Outmezguine

“We wanted to have a ‘gymboree’ of a different kind,” Farjun says. “One that would be pampering and enriching for children, and would also be a place where parents could meet and relax, a kind of bar, offering soft drinks, alcohol, sandwiches and good vibes. We started to look for a place, thinking it would take a long time, but luckily we soon found a site that was just right for us: not in a mall with see-through glass and not below ground level.”

Though the place was a shambles, the two saw its potential and agreed to pay a monthly rent of 25,000 shekels. Within a few months they had set up 115 square meters of play area, a closet of costumes, a crawl space and a climbing wall. Abutting it is a snackbar with outdoor seating. Bubush, which opened last May, isn’t very big – its maximum capacity is 50 people – but the sisters were optimistic.

They enjoyed full capacity from day one. “It was amazing,” Farjun says. “The place filled up so fast that we weren’t even able to conduct a trial period as we had planned.”

Then the coronavirus struck. “The situation deteriorated gradually,” Farjun says. “At the beginning of March business was down to 80%. From Purim [the second week of March] it got worse, but we were optimistic. We thought everything could be solved, that we could cope. Our place is disinfected every day, that’s routine, because some children have allergies.

“That’s why, when it was announced that the preschools would be closing in mid-March, we ran a day camp. There were up to eight children, we took their temperature when they entered, we disinfected even more intensely and parents weren’t allowed in. We did everything to protect the children.

“True, it was no longer the same income, but we thought we could make do. We saw it as a type of solution. A few days later we were ordered by the Health Ministry to shut down. That evening we informed everyone via Facebook and Instagram that we had to stop the day camp. That left parents helpless and us with no income at all, but there was no way around it.”

Today the two sisters are focusing on paperwork, grappling with bills and trying to figure out what to do. “We didn’t come from a wealthy home, we have no backing. How we will we recoup the investment?” Farjun asks.

“We created a business based on solid calculations and we supported ourselves from it. Now it’s all tottering. But despite everything, I’m optimistic, I believe that life is stronger than everything and that everything will be okay.”

Bubush gymboree, closed down by the Ministry of Health less than a year after it openedCredit: Oshri Outmezguine

No cash, no flow

Malul and the sisters are among thousands of young entrepreneurs who launched a new business over the past year. They couldn’t know that a virus would shatter their dreams and saddle them with bank debt.

There are nearly half a million self-employed people in Israel, and even in moral times it’s not easy. In 2019, about 56,000 new businesses were established, but some 44,000 closed down. A study by Roby Nathanson, an adviser to Lahav, the Israel Chamber of Independent Organizations and Businesses, the self-employed will suffer 20% of the damages caused by the coronavirus crisis, even though they constitute only 12% of Israel’s workforce.

Lahav estimates that the situation is costing the economy 500 million shekels a day. The group says that without government intervention, 120,000 self-employed people will be left without an income by May. Another 50,000 will suffer losses from which they won’t be able to recover.

From the outset, many of the self-employed have maintained that the state left them high and dry. While salaried employees who were put on unpaid leave receive jobless benefits, the self-employed are getting one-time grants of no more than 6,000 shekels in the first month and up to 8,000 shekels in the second as well as access to state-guaranteed loans.

The problem is that the grants are being awarded based on 2018 tax returns; if your business didn’t exist then, you get nothing. Even if the criteria are made flexible and the grant is paid based on 2019 returns, that won’t help people who opened their business recently. Plus, many businesses haven’t yet filed a 2019 return, and it’s impossible to do so at the moment.

Also remember that the most vulnerable are new businesses, which haven’t yet made a name for themselves, covered their investment or racked up experience. Their ability to cope with a mega-crisis is minimal at best.

“The prospect of a young business surviving a crisis depends on the burden it’s carrying,” says Anat Adler, whose firm Be Effective helps small businesses with management strategy. A business with a large loan or high overhead will have a hard time surviving the coronavirus crisis, she says.

“For now businesses have to try to generate as much revenue as possible so that even if they can’t cover all their expenses, they’ll cover as much as possible,” she says. “Businesses go under because of cash flow, and the current situation is above all a cash flow crisis.”

But new businesses aren’t the only ones being hit. Experienced entrepreneurs who sought to upgrade or expand are also battling the economy-wide lockdown whose end is as unclear as its scale.

A case in point is Yaki Kabir, the main owner of the Serafina TLV restaurant in Tel Aviv. Unlike Malul and Farjun, Kabir is a veteran entrepreneur, but March 14 is a date that he too won’t forget.

Serafina TLV in Tel Aviv, November 11, 2019.Credit: Moti Milrod

“We were told to shut down and that was that,” he says. “I’ve been working in the leisure business for 26 years. I had clubs and restaurants. Never during the worst terror attacks or when missiles were fired at Tel Aviv was there a government order to shut down a business. I went through all the big terror attacks, ups and downs, reforms, I’ve seen it all. Never did we get a shutdown order.”

He opened Serafina TLV – importing to Israel the international chain that began in the 1990s in New York – just five months ago at an investment of 10 million shekels. “Things were going great. And then the coronavirus arrived,” he says.

Turnover began dropping at the beginning of March. Just before the shutdown order, he ordered two weeks of supplies worth 150,000 shekels. The fish and vegetables were thrown out and became another expense at a time of no revenues.

‘No one thought about us’

“For a failure by me I’m ready to accept the consequences, but the coronavirus isn’t dependent on me,” Kabir says. “On the other hand, it’s also not a force majeure, so you don’t get indemnification from the insurance companies for a loss of revenues .... No one thought about us.

“In Berlin, if you’re self-employed you fill out a form online and in a few days you get the amount of the loss. Here no one pays attention to me. Who am I, anyway? I hold the controlling stake in a company and I don’t even get unpaid leave.”

Yaki Kabir, the main owner of the Serafina TLV Credit: Yaki Kabir

The restaurant is shuttered, but the expenses keep mounting. “The biggest difficulty is current expenses,” he says. “With everything frozen, you need zero outlays, but I can’t tell the insurance company that I’m not paying, because if there’s a break-in they’ll say I don’t have a policy. Insurance costs 4,000 shekels a month.

“If I don’t pay the security company 200 shekels a month, the insurance company will say that this is a condition of my insurance, so I can’t cancel that either. I call city hall to request a deferment of municipal tax, and they tell me there’s no problem about deferral and I can pay in six installments. If the restaurant is closed, how am I supposed to pay municipal tax of 22,000 shekels?

“I call the accountant and tell him there are no revenues and no expenses, but he says he still has work and that he too is floundering, so I pay him only 2,000 shekels a month. Even when the business is closed I have to pay an electricity bill of 1,000 shekels a month. I’m paying 50,000 to 60,000 shekels a month for a moribund business, and I haven’t yet mentioned the rent – 200,000 shekels a month. I can survive for a month, two months, take some sort of government loan.”

Can you sleep at night?

“The truth is, no. I get into bed with all kinds of thoughts and a queasy feeling in my stomach. The suppliers are calling, and even though the restaurant was open for only half of March, they want payment for the goods. Eighty percent of my suppliers don’t take goods back. So I threw out a lot. I don’t know how we’ll get out of this”

What do you fear?

“That Israelis won’t go back to what they were and won’t have money for leisure time and entertainment, at least until September. People will be afraid to congregate. And then things will be worse, because we’ll open the restaurant and generate an operating loss.

“When we reopen, I’ll have to pay for advertising to get the customers back. Everyone will be battling. The business plan was to cover the investment in three years and two months. That was realistic. The restaurant was open for only five months, and all the money I had is in its walls.”

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