Kevin O’Leary on the future of regional banks and what entrepreneurs should do now

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How is one of the world’s most prominent investors thinking about the economy, the future of regional banks and the industries that will come out of this slowdown on top?

I sat down with Shark Tank’s Kevin O’Leary to ask those things and more ahead of the show’s 15th season. In keeping with his usual direct style, he has predictions on consolidations in the banking world and a view on what has permanently changed for small businesses post-pandemic. He also shared details about a new side project designed to help entrepreneurs apply for a federal business tax credit.

O’Leary and I also discussed the importance of smaller firms having sustainability initiatives to appeal to their customer base, particularly Gen Z. You can read more about that part of our conversation in my newsletter The Green Era.

Below is an edited excerpt of our conversation.

What are some of the biggest changes you’re seeing in the business world after the pandemic??

Small businesses went through dramatic changes through the pandemic, particularly around understanding how their channels of distribution changed, and that's all changed over the last three years. What's happened is many people, because they were locked down for over two years, learned how to buy direct from companies, and so the cost of acquiring customers today is significantly different than it was pre-pandemic. The winners that have survived this have figured out how to build new business models where the margins are much higher. Now, with social media and direct-to-consumer models, [entrepreneurs need to] understand the logistics of servicing customers directly, and the data that you get about preferences, size, color and location is fueling the whole AI revolution. There's so much change — much of it positive — that one could be optimistic about what's going to happen in the next five years.

How do you see businesses contending with the rise of remote work and people leaving downtowns, particularly in big hubs that previously held a lot of workers?

Everybody involved in this changing work model, including the people who say it's all going to go back to normal and everybody's going to work in a cubicle again, understand that there's a fundamental change to the workforce; not only in America, but all around the world. So in our case, we probably have over 10,000 people in our portfolio of private companies and the supply chains that serve us. We made the assumption almost a year ago that we would reduce our requirements for office space by 15%. In states like New York, Florida, Texas, California, where we have many of these offices, we dialed back our lease demands. We were completely wrong.

The data now is 40% of our staff will not come back to the office, primarily in the areas of logistics, compliance and accounting. They have proven that they can do their work on a project basis from home.

You do hear these demands from leaders who say you have to return to the office. The truth is the best and brightest don't have to and they're not going to, and if you make that a mandate for your company, you're going to end up losing a lot of good people. I don't expect people who are working from home to work nine to five; what I expect is them to get the job done by a certain time and date.

Regional banks are struggling and indicators show commercial real estate could further drag them down. How are you feeling about the state of regional banks? Should small businesses be concerned?

Gen Zers and people in their 30s don't go to regional banking offices to bank — they do it online. We don't need 4,500 branches and 54 regional banks in America anymore. What I predict is going to happen [...] is they’ll consolidate down to maybe 20 regional banks with 800 branches in the next five years.

Commercial real estate is an interesting asset class because real estate itself — the building and the land that it's built on — actually never goes to zero. There's always an imputed value, particularly land. What does change is ownership. These real estate assets in regional banks that don't come up for financing for another 24 to 36 months — a large majority of them won't be solvent and they'll have to change ownership. Now, you would think that that would be a hugely volatile event, but because these things are going to happen over a staged period, there's a lot of stress financing being raised right now. These fund managers are being very opportunistic and waiting for banks to go bankrupt.

Let’s say I’m a private buyer and a bank I’m interested in is going bankrupt. I’m incentivized not to put a bid on any assets until it’s insolvent because I know the FDIC will rush in and eat 20% of the garbage on the balance sheet. That’s exactly what happened in all three of the banks that went under. That's the big problem with the regional banks right now.

We're going to have a massive transition of commercial real estate primarily to private-sector buyers. Equity will be wiped out from the bank balance sheet, and bonds of private banks will be wiped out. That's OK, and then we'll end up with 800 branches with maybe 20 super regional brands.

So what should business owners be doing right now then? Do they stick with their regional bank for the time being?

There is absolutely no reason to put more than $250,000 into a regional bank. Why would you take that risk? These big-bank CEOs don't want to talk about it, but I can tell you in our own portfolio, we have taken everything out of regional banks with the exception of $250,000 accounts that may be servicing payroll, but those are FDIC-insured. If your company is only doing $50 million to $60 million in sales, it's not hard to stay under the $250,000. Everything else we've swept out, and we've sent it to four large banks that don't have a guarantee, but there is an implied guarantee. The chance of JPMorgan going out of business is zero, in my view; it just would never happen.

You have a new side project helping small businesses with a federal tax credit. What is it and how can business owners take advantage of it??

It’s the Employee Retention Credit (ERC) program, and I learned about it about eight months ago. In the height of the pandemic, the federal government established the Paycheck Protection Program and the ERC. You could only apply for one. The ERC was designed to provide a refund if you kept your employees on W2s for the first three quarters of 2020.

It's a very short-lived program that you've got to apply for right away. It takes five months to do the application. I set up wondertrust.com to be an educational vehicle for people where they could learn about it, find out if they could qualify and then go through the application process with real, live experts. We put the application in, track it and maybe five to eight weeks later you get your check. You pay your fee after you've received your money, whatever that fee ends up being based on the complexity of the work done for you.

What’s the range of that fee? What would the most complex case cost?

The most complex case is going to cost about 20%.

Filming for season 15 of Shark Tank is kicking off. What is going to be different this season given the current economic climate?

We have a record number of applications. We're right back at 2008 again, as far as venture capital goes. You can't raise money anymore. It's next to impossible for a startup. Because capital is more expensive, most venture companies are really just looking at what they already have — which ones they're going to support, which ones they're going to let fail.

We used to get people asking ridiculous valuations, and you know that I’m a very vocal investor. If you come in with ridiculous valuations, you deserve to be punished. But I think [entrepreneurs] are going to be heavily tenderized this season, so we’re going to get some great deals and great companies.

You don't have to be at a time when everything's working perfectly in the economy to get great new ideas. Great entrepreneurs on Shark Tank are basically two years ahead of the market. I think we're going to see a lot of interesting products this year, and I know there are some trends emerging. The food category is very interesting because all of a sudden, everybody in every age group wants to eat better — less salt, less sugar, less carbs. There are a lot of interesting consumer goods and products around investing. People are very intrigued by how they can get financial literacy, and they realize today that we teach everything in schools except financial literacy, so we're seeing a lot of opportunity there.

Latest Developments

• Livestream shopping is bringing small businesses big bucks as more entrepreneurs embrace the trend that first took off in China.
• Employers, and tech companies in particular, are pushing workers to come back to the office as power sways back in their favor.
• Smaller companies, meanwhile, are leading the charge on the four-day workweek.
• The ERC, which O’Leary discusses above, is causing many businesses to be audited by the IRS.
• East Coast businesses are in for a tougher summer after a major interstate collapsed in Philadelphia, snarling supply chains.
• Companies are hoarding more talent in preparation for when the economy starts growing again, leading some to look for new benefits to keep workers happy, including fertility benefits.
• The layoffs happening across larger firms and in the tech industry could come back to haunt the businesses, with a new study showing that high performers were more likely to be impacted by the cutbacks.
• May’s Consumer Price Index shows good economic news, with inflation falling by half compared to 2022’s peak.

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