Turn It Up a Notch
Andy Cohen and Thomas Dickey see the same reports about the economic recovery, and both share an owner's perspective. But they have reached radically different conclusions about what it means for their businesses.
Cohen's company, Ticketcity.com, is spending $1 million to develop and deploy new software that will "defragment" the secondary market for sports and entertainment tickets online, where he competes furiously with three other companies. "I'm an eternal optimist," says the 37-year-old president and CEO of the Austin, Texas-based company, which raked in $11 million in sales in 2001. "But I believe if you give 100 percent, work hard and give good service, good things are going to happen."
For entrepreneurs, economic recovery can be as daunting as a recession.
Dickey acted more conservatively. Although he foresees a recovery for his Canton, Ohio-based company, Heinemann Saw Co., which reconditions saw blades for steel companies, Dickey, 65, just can't bring himself to make a purchase of $250,000 for computer-controlled, productivity-boosting grinding equipment. "I don't think any small-business owner would be inclined to do so, given the conditions," he says. Though his company projects sales of over $3 million for 2002, "We'll continue to have a cautious outlook for some time," Dickey says.
It's not exactly A Tale of Two Cities, but Cohen and Dickey's contrasting approaches underscore the fact that, for entrepreneurs, economic recovery can be as daunting as a recession. Torn between optimism about improving conditions and painful memories of the downturn that now appears to have ended, independent business owners are at a point of reckoning. Do you go on with making significant investments in your company? Or do you continue to hold back with uncertainty about the strength of the recovery and, perhaps, by other factors specific to your markets?
"I'm reading in the papers that the recession is over, the sun is coming out, music is playing in the background and everyone's happy again," says J.P. Frenza, a small-business specialist for IBM Corp. "But most owners say it's still very tight, whether they serve business-to-business customers or consumers. They're conservative with their spending, and everyone is in a hold-the-line mode."
Analyzing the Recovery
Though the circumstances of every business differ during this iffy time, there are plenty of common dynamics you can take into account as you make decisions about whether, where and to what extent to invest in your company during the coming months. Consider these factors:
* The small-business cycle: Everyone is eager to say the economy has turned the corner. Yet, even if recovery seems to have taken hold, it still may not be reflected in your company's numbers. That may be because the small-business arena is one of the last sectors to participate in an economic uptick, trailing large and middle market companies by six to eight months, says Mike Price, senior vice president of small-business banking for National City Corp. in Cleveland. He sees a small-business recovery in the second half of 2002.
Michael Butler, vice chairman of Key Corp., another Cleveland-based bank, adds "Small business might be in for a longer downturn and a slower recovery, or an even longer [period of] flattening out."
* Wisdom in numbers: The more sober outlook, bankers say, is reflected in the persistent caution exhibited by many entrepreneurs well into 2002. The majority of business owners continued to hold back from major new outlays in the second quarter. They're heeding the advice of people like Butler. "The last thing we want owners to do is gear up their business too far ahead before orders start to flow in, especially with capital expenditures," says Butler.
Of USBX Advisory Services LLC's three dozen entrepreneurial clients, "only three or four are making investments in their businesses," says Brooks Dexter, senior managing director of the Santa Monica, California-based investment bank. "The [others] are taking a cautious approach."
That's why Janet Dagle, owner of Basket Gourmet, which sells specialty foods, gourmet coffee and gift baskets, isn't spending the thousands she would like to invest in new displays and fixtures for her store in Selinsgrove, Pennsylvania. "There's nothing wrong with what I have, so why should I spend money now?" says the 45-year-old entrepreneur, whose company boasted 2001 sales of more than $100,000.
Similarly, David Gonzalez would like to buy some laser-equipped marking tools for his Toledo, Ohio-based company, but he doesn't trust his order flow enough yet to do so. "Customers are still only buying what they need, and they're buying in very small quantities," says the 43-year-old president and owner of Tooling & Components Corp., whose sales are about $1 million a year.
|To Spend or Not to Spend?|
Rewards of the Recovery
* The rewards of confidence: If you have the confidence to back your ambitions up with action and financial exposure, the early stages of recovery can be an excellent time to be proactive. "Good ideas are impervious to the business cycle," says David Horn, a partner with Tatum CFO Partners LLP, a national group of interim CFOs. "In a period like this, people look at their business models to figure out how to make money. It can be a fertile period."
But before you place your company on the bleeding edge, he suggests you be fairly sure your investments in your business will eventually pay off. To make that determination, ask yourself the following, says Dexter: "What indicators can tell you how your business is doing? Do you have benchmarks that have been tested during past economic cycles? What drives your business? Are you able to move fast? There's always an opportunity to be cautious in the near term and aggressive in the intermediate term if you feel comfortable around your indicators. There's an inflection point."
Some owners have overcome a lot to get past such points. Gerry Elwood's company, The Maids Home Services in Red Bank, New Jersey, had sales of $635,000 in 2001. But when Elwood lost customers in the September 11 attack, business slowed substantially last fall amid the marketplace shock. Since then, however, she has bought two more franchise territories and has invested in carpet-cleaning equipment so she could diversify her company's service offerings. "A bad economy can be a great opportunity," says Elwood, 49. "When a lot of people hid and tried to wait it out, I went the opposite way."
* The appeal of cheap acquisitions: Consolidation is a popular activity at this point in the economic cycle because the differences between the haves and have-nots in many marketplaces are exacerbated, and pickups can be inexpensive. "You can do a lot of good bargain-hunting now," says Don Williams, a San Diego expert on emerging growth markets for Ernst & Young.
|PUT YOUR MONEY ON(THE)LINE|
Good People, Hard Assets and Avoiding Debt
Triangle Printers Inc. is in such an opportunistic mode. While small printers in metro Chicago got in trouble during the recent recession after investing wildly in expensive digital equipment without being able to pay up, Skokie, Illinois-based Triangle was more conservative. "Every week, another printer is going out of business," says Harvey Saltzman, president and owner. "So we've acquired three companies in the last few years and are looking for more."
* The availability of good people: Gone is the legendary labor market tightness of the late '90s, replaced by a traditional balance between supply and demand. That means people with the experience, skills and talents you're looking for may finally be available. But upgrading doesn't necessarily mean expanding staff. "Most entrepreneurs would rather see the business first and worry about adding staff once they see more orders," says Dexter of USBX.
"You don't want to over-leverage your company if the economy doesn't recover at the pace you expected."
As a surviving Internet company, YellowPages.com has its pick of many experienced but unemployed dotcommers floating around the job market. "We've found high-quality people at prices that are shareholder-friendly," notes Dane Madsen, 44, president and CEO of the Las Vegas-based online phone directory. "We're not bringing in new people indiscriminately, but filling slots."
* The quandary of hard assets: With interest rates at a an all-time low, construction capital is cheap. But owners aren't eager to expand their factories or offices just yet. Similarly, prices of capital goods and other business properties are soft in the early stages of recovery. "Everything is favorably priced right now," notes Horn of Tatum CFO.
But for many entrepreneurs, that isn't enough to justify making big purchases. Dickey at Heinemann Saw says the attractive pricing of the equipment he'd like to buy is enhanced by his intention to purchase from a European manufacturer. That way, the dollar would work to Heinemann's advantage. "But that's still not enough to adjust the decision at this point," he says.
* The burden of adding debt: The last thing you want is more long-term debt. Solicit short-term financial help from friends and family or other sources, but avoid more bank debt even if you can obtain it. "You don't want to over-leverage your company if the economy doesn't recover at the pace you expected," says Key's Butler.
* The art of the possible: You can advance your company by focusing on what you can accomplish against today's economic backdrop rather than on the major outlays you're not ready to make. A good place to start is making sure your customers remain happy.
Entology Inc. grew robustly even through the recession, but Lawrence Prager isn't taking anything for granted. "You've got to lock down your customers so they don't have an excuse to go somewhere else," says the 38-year-old founder and CEO of the Bedminster, New Jersey-based IT consulting firm, whose projected sales for 2002 are about $19 million. That's why Entology added electronic invoicing as an added convenience for its customers. "If we can keep costs low and operate more efficiently than other people," says Prager, "we're going to invest there, because if the economy continues to be uncertain, we'll take advantage of our strength."
Dale Buss is a journalist and editorial consultant in Rochester Hills, Michigan.
- Basket Gourmet
- Entology Inc.
(908) 333-2300, www.entology.com
- Ernst & Young
- The Maids Home Services
- National City Corp.
(216) 222-3640, firstname.lastname@example.org
- Smith Welding Supply
644 Selden, Detroit, MI 48201, email@example.com
- Tatum CFO Partners LLP
(888) 858-2418, www.tatumcfo.com
- Tooling & Components Corp.
- Triangle Printers
(847) 675-3700, firstname.lastname@example.org