Ben Carlson, author of the personal finance blog A Wealth of Common Sense, recently wrote an article about the importance of getting one’s finances in order before a recession hits in order to take advantage of opportunities that may present themselves during a low point in the economy. Of course, Mr. Carlson was looking at it from a personal finance perspective, but we see the corollary for business owners as it relates to creating long-term business value. Even if the potential sale is 10 years down the road and even if it is only in the back of their minds, business owners should always be contemplating their exit and the incremental steps necessary to maximize business value, including those steps that present themselves during a recession.
Recessions are an inevitable part of the economic cycle. However, no one can predict with any certainty when a recession will happen — only that a recession will inevitably happen. So how can a business owner benefit from a recession or a temporary pullback in the economy? By being that owner that invests in their business at the same time that their counterparts are pulling in the reigns, hunkering down, and scrambling to remain in business.
An owner who invests in their business during a recession is similar to a contrarian investor who buys stocks instead of selling them during a bear market. The contrarian investor recognizes the opportunity to buy stocks at bargain prices while their peers are selling stocks in a panic. They buy at the lows, then profit when the market recovers, which, over time, it always does. Just think about the investor who sold all of their positions and went to cash back in the financial crisis of 2008-2009. If they stayed out of the market for the past 10 years, they missed an opportunity to profit during one of the longest-running bull markets in history. By contrast, a contrarian investor who had the fortitude to keep buying despite the rampant sell-off that happened a decade ago would have enjoyed remarkable returns.
The same holds true when a business owner invests in their company during a recession. Essentially, the owner can buy assets like inventory and equipment “on sale” and/or hire extremely talented employees that might not otherwise have been available while some of their peers are liquidating inventory and equipment at fire sale prices and/or laying off employees in a desperate attempt to avoid running out of cash and going out of business. Sure, the owner is experiencing the same recession as their peers and sure, the owner is being a contrarian by spending money to fortify their business during the recession, but they end up spending a lot less when they make these investments during a recession than investing when the economy is on an upswing. It is the epitome of buying low. The owner who has taken proactive steps to set up their business to rebound from the recession will own a company that emerges from the recession like a rocket ship compared with their asset-dumping, cash-poor peers who limp out of the recession badly weakened and in an inferior position to compete in their market.
As Mr. Carlson wrote, “The caveat in all of this is you must be prepared for a recession before it actually happens. It’s impossible to take advantage of lower asset prices… if you don’t have your finances in order ahead of time.” Of course, a business owner has to be well-positioned to take advantage of opportunities that arise during a recession as well. For the business owner, “well prepared” includes utilizing moderate leverage with debt “head room”/having large cash reserves, maintaining a strong relationship with their friendly banker to have access to capital, and having a solid relationship with their vendors in all economic environments. Because opportunities to make investments at a discount (purchase inventory and equipment and/or hire talented employees for example), can happen at any time, business owners that are well prepared can benefit from these market downturns/times of economic recession. Business owners who have their financial ducks in a row are, obviously, more likely to be in a position to capitalize on such opportunities when they arise than their unprepared counterparts.
Although owners may not be specifically thinking about selling their company for many years to come, recessions can present an opportunity for them to shore up their businesses to emerge from a recession in a position of strength when the economic tide turns favorable again. It also puts them in a position to create more business value compared with the status quo/hunker down approach. Of course and as noted above, the enterprising business owner must have plenty of dry powder to take advantage of these opportunities when they arise. This strategy will ultimately have a positive impact on business value regardless of whether the business owner is seeking an exit in the near term, or whether they intend to sell their company many years in the future.
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