Recession pros and cons | The two sides of the same (increasingly less valuable) coin
A recession has two faces. One is smiling, that of the upstart small business owners launching new endeavors full of hope, vigor and promise. The other face is frowning, belonging to established small business owners trying desperately to survive, often with head in hands wondering, “How did I get into this position?”
History tells us that recessions are a good time to start new businesses. The list of major companies born during a recession is quite long — Procter & Gamble, General Electric, Fedex, Hyatt Corp., Sports Illustrated and CNN, to name just a few. Half of all the companies on the Fortune 500 list in 2009 claimed to have started during a recession. The same is true with smaller ventures, as almost 50% of the companies listed on the Inc. 500 fastest-growing companies list in 2008 started as recession babies.
Companies are born during economic downturns for a variety of reasons. Displaced employees get discouraged with the tight job market and opt to do something on their own. Others get frustrated when their hours are cut and decide they don’t want their working life in someone else’s control. Still others have a great idea or new concept that their present employer can’t initiate due to the company’s anemic cash flow, so they decide to run with it themselves.
If you can figure out how to attract customers in a tight market, there are many reasons to make the leap to self-employment. The competition will never be weaker than it is during a recession. Competitors’ inventories are low, their advertising budgets have been slashed and they have cut back on payroll — all factors that make it a good environment for startups.
Of course, if you need lots of cash, it’s not easy to obtain it from a bank during a recession. Banks will tell you that they are lending. What they don’t tell you is that they’ve changed the lending rules. While they welcome you to come in and make presentations, be prepared to be scrutinized, patronized and, most likely, disappointed.
A dose of realism
Unfortunately, in my business, we’re seeing a lot of the frowning face of the recession. Almost every other day, we’re introduced to an established business owner in trouble. Most commonly, their revenues are way off and they can’t support their overhead. Many decide that selling their company is the answer. As you can probably imagine, at the depth of a recession is not the optimum time to consider putting a business on the market. Yet many stressed business owners think someone will buy their enterprise because “we used to do so well. We were the best in the industry. We had the best employees. We were rockin’ and rollin.’” Regretfully, that’s all in the past.
When determining business value, it is all about what you have done lately. The fact that sales and profits were great in 2006, 2007 and 2008 certainly gives a buyer hope that the company can prosper as it did during the glory years. The reality, however, is that business buyers will pay only for how the company performed in 2009 and 2010. They really have no choice. None of us can predict when the economy is going to come back and a business buyer has to have a plan for success through the current downturn. Further, their lenders will look only at very recent history when determining how much to lend. It is not easy to explain this to longtime business owners. It is not fun to watch their frowns grow deeper.
If you think selling is your answer, I urge you to study the market and be ready to be flexible. If you can hold onto your business, then make adjustments — at the very least to keep you treading water — as soon as possible. The most common lament we hear is, “I should have done something earlier.” Sitting on the fence when big decisions need to be made provides prosperity to no one.
History tells us that there have always been recessions and more are likely to come. Assuming we get out of this recession sometime soon, we can expect another one will occur within the next 10 years.
If you are one of those business owners wearing a frown and find it difficult to make those tough decisions, there are professionals out there who can help you make it happen. If you’re one of the smiley-faced new entrepreneurs, then this is a great time for you. I suggest, however, that you look at the faces of the hardened business owners around you and vow that when the next recession hits, you won’t have to frown your way through it.
Stephen Vlachos, principal at Caswell Vlachos Group LLC, a business brokerage firm in Portland, is a serial entrepreneur and business consultant. He can be reached at svlachos@caswellvlachos.com. Read more here.
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