Troy Wragg, 26, and Amanda Knorr, 25, co-founded real estate development firm Mantria Corp. three years ago with $5,000 and an interesting business proposition: The company would pay more than the asking price for properties if landowners agreed to be paid after Mantria sold their land. The business model worked--the Bala Cynwyd, Pennsylvania, company reached $15 million in sales last year.
The U.S. housing market has changed drastically since 2005, however, and Mantria is experiencing the market aftershocks caused by the credit crunch and skyrocketing adjustable-rate mortgage payments. ARM resets "will definitely affect our business in real estate and real estate finance," Wragg says.
Now the 32-employee company is adjusting its business model to meet the demands of a tougher business environment. Mantria is diversifying into property title and focusing on properties in lower-priced geographical areas. It's also offering buyers additional financial concessions, which will decrease the company's profit margin by 5 percent this year. "That 5 percent is a haircut we've taken to make sure the buyer is getting more out of the deal," Wragg says. "We'll buckle down by taking less pay."
Indeed, companies are growing more cautious in the face of adversity: Recent data indicates that entrepreneurs are less willing to hire and make capital outlays this year. Optimism among CFOs, meanwhile, reached a record low in the latest Duke University/CFO magazine "Global Business Outlook" survey, which gauges how CFOs feel about the economy. "There's a lot of uncertainty," says John R. Graham, a Duke University finance professor who heads up the quarterly study. "And uncertainty itself can cause you to put on the brakes."
Entrepreneurs might think their industries are recession-proof, but this is dangerous. While a few industries can perform just fine or even better during a recession--debt collection and legal services, to name two--most do not. Graham suggests entrepreneurial firms refrain from hiring unless demand is already there. They should also be more cautious with expansion plans. Small companies are "most subject to having a hard time borrowing, so it wouldn't be a time to use up cash on expansion," he says.
Other experts take the opposite view. Jonathan Kramer, who works with entrepreneurs as the founder of executive coaching firm Business Psychology Consulting, thinks now is the time to expand your thinking. "Successful entrepreneurs don't think, 'How can I shrink my business?' If one thing isn't working, something else will," Kramer says. That something else could be to target new segments, create new promotions, expand into new product lines, provide even better customer service--anything but playing it too safe. "It's working with what life gives you--the old 'we'll make lemonade out of lemons' [line]," Kramer says.
Authentium, a 6-year-old Palm Beach Gardens, Florida, security software company with 80 employees and annual sales exceeding $12 million, is exploring new international markets. "In times of slowdown, it is very necessary to take a global view," says founder and chairman John Sharp, 48. "You need to look for economies that are doing well." Sharp projects that Authentium's sales will increase 35 percent to 40 percent in 2008.
A difficult economic landscape requires more creativity, imagination and courage. Luckily, entrepreneurs have these traits in spades. It's all in how you play your cards. "We're scaling up instead of down," says Wragg, who expects sales of $33 million for Mantria this year. "We're focusing on what people will want in a recession."
Chris Penttila is a freelance journalist in the Chapel Hill, North Carolina, area.
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