Recession Session
This story appears in the March 2002 . Subscribe »
Dallas entrepreneur Sean Magennis started his human resources management software business in Toronto 11 years ago during one of Canada's worst recessions. Atlanta marketing company owner Jan Lok and Appleton, Wisconsin, construction entrepreneur Paul J. Hoffman both opened their businesses' doors only to be greeted by two recessions in five years. And when David Gauger's San Francisco advertising agency took in its first dollar 27 years ago, the United States was reeling in one of the longest downturns since the Depression.
When it comes to recession, these entrepreneurs have been there, done that.
As the United States enters its 11th recession since 1945, entrepreneurs who have seen it all before offer caution, hope and advice to those experiencing their first slump. And despite predictions that this recession will be shallow and short, experienced entrepreneurs say newbies' anxiety is appropriate.
"It's a very risky time," says Gauger, 51, principal of Gauger + Santy Associates. "You can't put it on autopilot."
One path many entrepreneurs are taking is to lie low and try to ride it out. Others opt to expand energetically to gain an advantage on competitors when the recession ends. We talked to experts and entrepreneurs to learn how and when they recommend aggressive or defensive postures in four areas: managing money, managing people, marketing and technology.
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Money Matters
During a recession, companies that fail to hang on to cash often don't survive. Those that do may live to see better times. Sound simple? It's not. For instance, entrepreneurs who hope to hang on to cash by delaying payments to suppliers and creditors are deluding themselves and may be making matters worse, according to Tom Kinnear, executive director of the Institute for Entrepreneurial Studies at the University of Michigan in Ann Arbor. If stretching out payments is the only way to get through, you're already in so much trouble that you should consider liquidating, Kinnear says. "We're talking about basically financing the company with short-term debt," he says. "And that always fails in the end."
Jan Lok agrees. "I don't extend any accounts payable," the 52-year-old founder of Marketing Resources says. "That just gives a false sense of security." If anything, Lok pays bills sooner so he can see the monthly net.
That doesn't mean you have to idly watch your cash evaporate. With interest rates low, now may be a good time to borrow or to refinance loans or mortgages to reduce payments. On the other hand, be wary of temporary low-cost financing. Hoffman, the 48-year-old president of Hoffman Corp., recalls taking out a floating-rate loan at 14 percent during the 1981-1982 recession. "We floated right into 22 percent," he says. "That was scary." The move almost cost him his company.
With rental rates low in many markets, you may also save money by renegotiating your lease or moving. Gauger is renewing his lease for five years at 50 percent less than it would have been a year ago, when the Bay area market was red hot. That's a significant long-term benefit, he notes. "The cost for rent is probably only No. 2 to employee payroll."
Whatever you do, don't overdo it. If a lease looks tempting or a loan looks like a bargain, ask yourself if you really need new quarters or more money. A loan officer recommended the floating-rate loan that almost sank Hoffman. "In recessionary times," he says, "you have to make sure someone else's sense of urgency isn't pushing you to make decisions you shouldn't."
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How Will You Manage?
A layoff is often a first response to declining sales. It's also one of the hardest because it disappoints people who depended on you and can demoralize those who remain. When you face layoffs or rumors of layoffs, talk to people and reassure them. "You need presence so that people have faith in you," says Kinnear.
What shouldn't you say? "It's easy during a recession to point your finger at others," Hoffman says. "But strong leadership says all fingers point one way." Accept all responsibility and distribute credit generously.
If you're aggressive, tough times can be the best for hiring good people and developing current employees. "There are more good resumes on the street right now than I've seen in at least a decade," says Kinnear. Lok says his employees are less demanding when it comes to perks and pay hikes, too. Gauger believes now is a good time to spend money on training. "People are not as likely to jump ship," he notes. "You have an opportunity to build on a stronger level of loyalty."
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Marketing Sense
Sales, advertising and marketing are early targets for entrepreneurs navigating recession. And it's not a bad time to trim efforts to sell to marginal accounts. Take a fresh look at existing customers and new markets to winnow out the least profitable and reliable. "You shouldn't have all your eggs in one basket, but you can have more eggs in the baskets you have the most confidence in," says Hoffman.
Also, focus on finding quick sales rather than long-term marketing. "You want orders," says Kinnear. "[Don't] waste time at trade shows where people aren't buying anything at the moment."
Another approach is to ramp up sales efforts. As customers for Lok's marketing newsletters become coy, he feels he has to pursue them more energetically. "If I'd traditionally mail 25,000 direct-mail pieces, I'll send out 30,000 this year hoping to get the same total response," he says.
Now that competitors may be marketing less, you also have a chance to grab market share. Says Norm Stoehr, founder and CEO of Inner Circle International Ltd., a Minneapolis-based organizer of entrepreneur peer groups, "Everyone else is in a fetal position, waiting for the recession to play itself out. Now is the time for the bold ones to step forward."
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Tending to Tech
For some entrepreneurs, investing in new technology is an imperative in good times and bad. Hoffman has spent heavily on computers for training and networking as well as designing and managing construction projects. Sharing that attitude may be essential for you to come out of the blocks strongly when the starting gun fires for the next expansion, says Tim Petersen, managing director of University of Michigan's Institute for Entrepreneurial Studies. "If you get out of control on cost-cutting," he warns, "you're going to lose out on the next cycle."
Others are more cautious. Gauger's company has a three- to five-year plan for acquiring and integrating new technology and is generally sticking to it. But Gauger says, "Now that things are scarier, we are not looking at a major outlay for technology."
Finding
Inspiration
The best tools for managing through a recession may be your fellow
entrepreneurs. Sean Magennis has overseen two layoffs at Thomas
International USA Inc. since last summer. Now down to just 12
employees, the 36-year-old entrepreneur still isn't sure
he'll make it through the recession with much more than just
himself. But he has gained some valuable perspectives from
discussing his situation with colleagues at the Dallas chapter of
the Young Entrepreneurs Organization (YEO), an international
association providing business owners under 40 with a way to get
together with their like-minded peers.
One very important lesson Magennis has learned is that it can get worse, and you can still get through it. "Our friends in Mexico have managed through several massive devaluations the likes of which we have never seen before, and they have a very different perspective," he says. "They regard this as a minor irritant."
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Finding Inspiration
MONEY
MANAGEMENT
MARKETING
TECHNOLOGY
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Mark Henricks is Entrepreneur's "Books" and "Smart Moves" columnist.
Contact Sources
(415) 434-0303, www.gauger-santy.com
Hoffman Corp.
(920) 731-2322, www.hoffman.net
Inner Circle International Ltd.
(952) 933-6629, www.theinnercircle.com
Thomas International USA Inc.
www.thomas-net.com
University of Michigan
www.zli.bus.umich.edu.
