Recession Session

This story appears in the March 2002 issue of Entrepreneur. 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.

Survive the Recession!

Money Matters Managing People Marketing Sense Technology Tactics The Rules of Recession

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."

Online Exclusive

Stay up on economic trends with the National Bureau of Economic Research, the private nonprofit organization that officially declares when the U.S. economy enters recession, at www.nber.org or by calling (617) 868-3900. Irish business-planning software company Invest-Tech Ltd. has a concise roundup of tips for making cash-flow forecasts, managing working capital and other techniques crucial to managing money through a recession available free at its Web site at www.planware.org or e-mail info@planware.org.

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."

Online Exclusive

The University of Michigan is holding a seminar called "Leading In Difficult Times" that addresses questions such as: How do you console your employees and be more caring, while at the same time contemplating downsizing and layoffs due to the economic slowdown? The three-day program costs $600. Learn more at www.bus.umich.edu/execed or by calling 734-763-1000. The SBA has collected "14 Survival Tips For Managing During Economic Downturns" on its Web site. You'll find tips ranging from advice on gaining market share to making best use of employees during a recession.

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."

Online Exclusive

The American Marketing Association has dozens of authoritative articles about proven methods for marketing during tough times available online. Register to get free access to articles and select the topic you're interested in under the Best Practices tab. You can also sign up to receive free email newsletters and news alerts. Jay Conrad Levinson wrote Guerrilla Marketing in the aftermath of back-to-back recessions in the early 1980s. And there's still no cheaper, livelier or better manual for low-cost marketing than the $13 paperback third edition of this classic: Guerrilla Marketing: Secrets For Making Big Profits From Your Small Business

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."

Online Exclusive

How can you get the new technology you need without spending a fortune? One possibility is through barter. You can learn how to swap your own products and services for the latest computers, software and other technology by reading the official journal of the barter business, Barter News. Visit their Web site or contact them via email at bmeyer@barternews.com. For a quick, insightful wrap-up of key directions in information technology, you can't beat the Trends Report published by The Software & Information Industry Association. The annual analysis for 2001 highlighted wireless technology, electronic publishing and targeting global markets in the digital economy. You can read the executive summary for free online.

Finding Inspiration

Rules of Recession

MONEY Cut costs by renegotiating leases, loans and other long-term commitments. Don't try to save cash by stretching payables; you may alienate suppliers. Don't let a sense of emergency push you to make rash cuts. MANAGEMENT Be visible to employees. Be accountable; don't blame troubles on anything but your own decisions. Look for opportunities to improve or expand your work force. MARKETING Re-examine customers to make sure they're profitable and dependable. Focus marketing efforts on opportunities for quick sales. Take advantage of competitors' excess timidity to expand. TECHNOLOGY Don't overreact; stick to your long-term plan for technology investment. Don't miss out on innovations that could let you compete in the next boom. Invest only in technology offering current benefits, not just features you may one day need.

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Mark Henricks is Entrepreneur's "Books" and "Smart Moves" columnist.

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