Sometime around 1981, I was working at a large local CPA firm. We were in the throes of a massive W-shaped recession. Interest rates had skyrocketed, and unemployment was rampant. The managing partner was exceptionally chipper one day, so I asked him why, given this deep recession. He answered, “Recessions are opportunities: they change how people think and act, and if you do it right you can thrive in them.”
He took me to a client’s tool shop. The parking lot was full, and a friendly receptionist greeted us with a smile. No one was working at their desk, and as we went through the shop, I noticed it was empty as well. It was empty, but it was spotless: the floor was perfect, the machines were painted, the tools sharpened, the lockers were sandblasted and freshly painted with neat name tags on the doors. The overhead doors were open and outside, a whole group of people was playing full-court basketball in the parking lot. I asked what was going on.
The managing partner pointed to a guy, a bit older than the rest. When the game slowed down, he introduced me to the owner. “He (nodding to the MP) taught me that recessions were opportunities. When this downturn happened, I made cuts to my payroll, got rid of the dead wood. I cut the ‘C’ players early and kept the ‘A’ players, as he gestured to the basketball court. Then I had my crew clean the shop, and when that was done, fix up the locker room. Then we didn’t have anything else to do, so we built this court. Now we play hoops, get in shape and plot world domination.” I asked if he thought his plan would work. “See that guy?” pointing to big fellow at a picnic table. “He’s laid off from my competitor. He’s a fantastic young tool guy, tons of potential; he’ll be a huge asset to my team. I made room on my payroll for guys like him. When we get back to business, he’ll be playing for us.”
When that recession ended, like they all do, this client’s business quadrupled. He had seized the opportunity.
And today ... The U.S. is experiencing the second longest (by July 2019, the longest) expansion in history. Sooner or later, the economic cycle will bear itself out and there will be a slowdown. The economic cycle is a natural part of a free-market economy. The cycle moves in a predictable order: expansion, peak, recession and trough. It’s been happening in free-market economies for as long as they have existed. It’s like the seasons in the Midwest: spring follows winter, and summer follows spring. In “Great Lakes States” like Michigan and Ohio, sometimes winter is ugly, and other times it’s mild. It is, however, a foregone conclusion that winter is indeed coming.
We’ve analyzed the last 11 recessions, identified what’s similar (some symptoms clearly) and analyzed what’s different (a few, like oil and the Fed balance sheet). What has emerged is a single indicator that is a consistent precursor in each post-WWII recession (the 10-2 yield curve inversion).
>> Read more about the yield curve in “On (Yield) Curves and What They Mean in a Terms of a Recession.”
It’s important to look carefully at where we were, and where we are, to ascertain where we might be headed. However, if you know a recession is imminent, you can seize the opportunities. There are certain consistent outcomes in recessions in employment, in crushing your competition, in lending and in investing. It’s important to look at the past and learn from it, to live in the present and act on it, and to consider the future and plan for it. The most successful business owners and most trusted advisors don’t just protect the gate, they ‘peek around the corner’ to see what’s coming.
We’ve identified a variety of ways to prepare for recession. Below are some of the top, practical steps business owners can take right now to be ready for whatever and whenever economic change comes.
1. Do a Business “Gut” Check
Do an overview of all finances — income statement, balance sheet and cash flow. What is good? Where do you see risk? If you’re a business owner, consider how this business risk will impact your personal financial situation. Do you have enough cash to support your personal needs? Can you contribute personal resources to the business to weather the storm? How significant is your personal and business debt? Is this a good time to refinance and extend terms?
2. Lean Up
Lean-up budgets. Dump useless stuff now. Ask yourself, “If I didn’t have “X," would I hire/purchase it now?" If the answer is no, it should be trimmed.
3. Have Dry Powder
It’s important to have cash reserves to get you through the downturn, plus have funds to deploy for expansion.
4. Check Credit Lines
Check your credit and lines of credit. Get business loans lined up before a downturn. Consider pulling out some cash early.
5. Consider Waiting on Large Purchases (Capital Expenditures)
In recessions, prices tend to go down, and companies are more eager to sell, meaning deals and discounts abound. In addition, sadly, many companies go out of business and have assets for sale making a recession a great time to buy. Consider delaying significant expenditures until the downturn. Be an opportunistic buyer.
6. Keep a Close Eye on Your Competition
In a downturn, many businesses are unprepared. Seize this opportunity to buy them out, hire their employees or advertise when they stop.
7. Look for New Ideas
The best time to start a business is during a downturn. Good people are out of work, companies have folded or spun off divisions, and there are opportunities in technology and product expansion.
8. Build and Protect Your Team
Bring your team together and ask for their ideas. Be transparent; rumors can kill a business. Do your best to keep all of your ‘A’ players, even if they are painting the shop room floor or setting up a basketball hoop in the parking lot.
Somebody will survive the recession, and it may as well be you! We’ll leave you with a simple mental exercise: Suppose it’s March of 2000 or August of 2007, and you aren’t sure, but it seemed as if we might be headed into a recession. Maybe you thought the ‘dot-coms’ couldn’t go on forever, or maybe you saw the mortgage frenzy getting too overheated. Equipped with the knowledge you have now, what might you have done differently? Then think about what that means for you and your business today. As Mark Twain wisely said: “History doesn’t repeat itself, but it often rhymes.”
Leon C. LaBrecque, JD, CPA, CFP, CFA, is the Chief Growth Officer of Sequoia Financial Group, LLC. Contact him at email@example.com to discuss this topic further.
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