Is a Recession Actually a Good Time to Expand Your Business?
Are you considering putting your expansion plans on hold because the nation may be headed for a recession? Don't, and here's why.
Entrepreneurs typically react to recessions in one of two ways. The natural inclination is to hold off on expansion plans or even scale down current efforts. But then there are those courageous business owners who grab the reins and keep moving their businesses forward. They know that the time to go big is when others cut back because their efforts will stand out.
It's smart to stay busy while your competitors are quiet, so a recession could be the perfect time to expand your small business. Here's why.
Related: How to Recession-Proof Your Business
As mentioned above, an uncertain economy leads many business owners to adopt a wait-and-see attitude. They may cancel previously planned product launches, put hiring plans on hold or significantly cut back on their marketing efforts — that just means more opportunities for bold entrepreneurs to take the limelight.
However, this doesn't mean you should blindly proceed with your growth strategies. Instead, relook at your plans, see what still makes sense and prioritize. Some regions may be harder hit by a recession than others, so you may have to reconsider expanding into specific markets. But your research may reveal other areas that would welcome your business and may even offer incentives for you to move into their market.
One of the first things businesses often reduce in a recession is their marketing spending. Don't. Your marketing dollars will likely go further, and your efforts will have a better chance of standing out while other companies have gone quiet.
The same holds true for attracting investment dollars. According to Crunchbase, seed funding flourished this past May, with $3.1 billion invested in seed-stage companies, 11% more than the average $2.8 billion invested monthly in 2021.
Top talent emerges
The Great Resignation saw 47.8 million workers quit their jobs last year, and the trend continues. According to a recent report by McKinsey, the "competition for talent remains fierce," with 40% of workers planning to leave their current jobs in the next three to six months. That's good news for companies looking to hire top talent — if you understand what employees want from their employers.
According to the McKinsey report, workers leave their jobs because they want better career development and advancement opportunities and to make more money. They're also facing uninspiring leadership and a lack of meaningful work. Many want flexibility from their employers and prefer to work remotely, at least part of the time.
Fortunately, since many companies lay off workers or institute hiring freezes during a recession, it can be an excellent time to hire skilled staff and solidify your future position.
Let's make a deal
Although inflation has caused prices to rise in the last few months, there are signs those inflationary pressures may be easing, and the threat of a recession could bring them down even faster. Be on the lookout for sales and promotions for essential equipment, technology, inventory from your supply chain or even the cost of real estate. With the recent reduction in gas prices, most experts believe high prices, in general, will be lower in 2023.
Expanding your business
If your plans include expanding your business into other states, be aware that most states have specific filing requirements for you to operate in them legally, and these rules vary by state. In most cases, business owners do not need to start from scratch. Instead, they can apply for "foreign qualification," which allows a company created in one state to register their business with the Secretary of State in the states where they plan to conduct business, which includes:
- Having a physical presence (e.g. office space, warehouse or retail store) in the state
- Storing inventory in a state, such as merchandise stored by Fulfillment by Amazon (FBA)
- Conducting in-person meetings with clients or customers in the state
- Having employees who live or work in the state
- Reaching economic nexus
Each state has its own threshold for economic nexus, which typically means a business achieves a specific sales level in that state. Once a company has economic nexus, it must collect and submit the sales tax to that state.
Businesses structured as limited liability companies (LLCs), C Corporations, S Corporations or limited partnerships (LP) must register for foreign qualification. Typically, because the process varies by state, many business owners hire an independent "incorporator" to handle registration in the states they want to conduct business in, so they can concentrate on other essential aspects of growing their businesses.
Recessions aren't new to the U.S. economy, obviously. According to data compiled from studying past recessions, reported in Harvard Business Review, the key to thriving during a downturn is to prepare for one before it strikes.
Research conducted about businesses that thrived during the Great Recession shows that companies that made contingency plans before it started were able to grow, while those that didn't went into "survival mode, making deep cuts and reacting defensively."
While these studies primarily involved big businesses, the information is helpful for small business owners. Two critical steps to take now:
- Reduce debt. Examine your cash flow, make sure your receivables are up to date and collect on those that aren't. Look at your payables. Are you paying for things you don't use?
- Digitize. Small businesses that have digitized their operations are more flexible, productive and cost-efficient.
If you currently outsource things like payroll or managing your receivables and payables, don't think you'll save money by bringing those tasks in-house. It may cost less in actual dollars, but the time lost isn't worth it.
It may sound counter-intuitive, but recessions are often great times to invest in your business and devote your energies to sales, marketing, and idea development.
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