Wednesday, March 25, 2020

How Entrepreneurs Can Survive the Next Recession

Written by: Per Bylund
Assistant Professor of Entrepreneurship and Records-Johnston Professor

There has been increasing talk of a burgeoning recession, whether because of a historically rare decade-long economic expansion or recent reports of an inverted yield curve, which is traditionally an indication of a downturn. Any recession is hard on all Americans, but it can be particularly devastating for entrepreneurs, who often have more to lose. Not only does an economic ebb add to the uncertainty of owning and running a business, but it also means opportunities become scarcer, with fewer potential partners willing to invest, consume and otherwise enter into deals.

Recessions, of course, are famously hard to predict, but even when there's mounting evidence of a looming crisis, it can be hard to anticipate timing and how it will affect your industry. Simply closing shop is no solution. It might not even be an option. A better strategy is to prepare for the worst and make your business downturn-proof. But how does one do that? Here are four things to think about that can help make your business recession-ready ... just in case.

1. Tweak your value offering.

Successful entrepreneurship is always about providing value, but that value always rests in the eyes of your customer. This does not change during a recession. In fact, it may be even more important to let value decide what you offer, how and when. Ask yourself not what the value of your offering is, but what it will be to your customers in bad economic times. If they are expected to prioritize differently, so should you.

2. Choose flexibility over cost.

A downturn brings less economic activity, so it seems intuitive to focus on cutting costs, but that might not be prudent. Production costs are typically lowered (and kept down) by making large upfront investments in capital goods like machinery and factories. For this to make sense, however, you need large sales volume to cover the cost of your fixed capital. This could be a disastrous move in a recession if customers hesitate to purchase. It may be much more important to be able to quickly and costlessly scale down production in response to the downturn. Flexibility, and especially downward flexibility, may be more important than average production cost.

3. Renegotiate contracts with suppliers.

When you begin to worry about a recession, it is likely that your suppliers and other stakeholders do too. That's when it's a good idea to start a discussion about what to expect and adjust contracts -- especially long-term contracts -- to better fit hard economic times. Your suppliers are better off if you stay in business even if it means they cannot sell as much as the contract guarantees. Discuss and negotiate possible tweaks or add downturn clauses that you can use if the economy starts tanking.

4. Think of it as an opportunity to expand.

A recession breeds pessimism, so it's natural to hold back and tighten the belt, but that's what everyone else is doing, which means competition is much lower and that asset prices fall. With increasing unemployment, it will be easier to hire skilled workers. For businesses that don’t tank with the economy, therefore, this is an opportunity to expand, and at a discount. So make sure to have enough money in the bank to take advantage of the potential buyer’s market a recession brings.

The proper way to anticipate an economic slowdown is not acting out of fear but preparing for what it might bring. Entrepreneurs who see the signs of a downturn and take the time to make their businesses recession-ready not only have a greater chance for survival, but can take advantage of the opportunities that it brings, and just maybe come out of it even stronger.

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