Standing in a room of early-stage entrepreneurs after the real estate market collapse, I remember telling them, “Well, if you survived 2008, you certainly should be able to handle just about anything!” What a ride we have had since then.
Of course, the world economy and its many nuances has impacted small businesses for centuries. Now, however, coming off another historic event, the pandemic, and facing a possible recession, what should a founder do to brace for that next twist and turn on this wild ride?
>> Look Up! - Small business owners are so wrapped up in their day-to-day that even the biggest headlines sometimes get missed. As a founder, you have to take a minute to look to the horizon for the next big thing, especially if it's tough times.
>> Buckle Up! - Whether you are a startup or have been in business for decades, preparation is the key to survival. Identify the controllable aspects of your business and gather the resources needed to manage them. Also, by knowing what you cannot control, you won’t waste precious resources trying to change the unchangeable.
>> Stay “Up!” - A positive attitude and the ability to see opportunities where others only see doom can mean the difference between surviving and thriving in tough times. Some of the greatest business success stories were born out of hard times.
Preparation is the first step. Focusing your preparation on the challenges ahead is next. Here are a few things to keep your eye on as a startup, growth-phase, or transitioning founder.
According to the Small Business Administration, the average small business starts with a $3,000 capital investment. While that may not be suitable for a bank loan, many businesses will have to borrow money at some point.
Rising interest rates make borrowing more expensive which cuts into cash flow. However, coming into a new market in challenging times may give a more nimble startup an advantage over established companies carrying debt.
Raising capital for growth also becomes more expensive as interest rates rise. Bank funding will likely still be the least expensive source of funding but more creative options like partnerships or outside investors may become more appealing, since terms and costs may be more negotiable outside market conditions.
Transitioning businesses find that interest rates can do a number on financing and valuations. If buying or selling a business is your plan in tough economic times, be mindful that it might be challenging to raise capital at a reasonable cost. That said, you may also find undervalued businesses in a down market.
2. Consumer Spending
Generating revenues is crucial to startup businesses. When consumers pull back their spending, sales drop and founders tend to slow down spending on marketing, labor, and inventory. This may turn into a “survival-only” mentality and leave a small business unprepared to catch the upswing when the economy improves.
Growth-stage businesses are normally better positioned to weather reduced consumer spending. They’ve had the opportunity to diversify revenue streams and can switch marketing efforts to products and services that are focused on consumer needs rather than luxuries.
Similar to rising interest rates, a decline in consumer spending resulting in a drop in revenues can decimate business valuations. Sellers will need to lean on other factors to justify their asking price, like intellectual property, reputation, and market position.
3. Unemployment Rate
Recent unemployment reports showed four million more job openings existed than there were workers to fill them. A tight labor market usually means increased labor costs for sub-par labor. This is a bad combination for small businesses trying to compete for top-notch talent. Founders will have to get creative by offering benefits their competitors can’t or won’t.
Stable companies in growth-phase are normally more appealing to employees, making it easier to retain good talent. Conversely, employees with critical skills may become more valuable in the labor market and cause a re-shuffling of the skills deck within a business due to turnover.
Instability in the labor market can make business buyers uneasy. Sellers will need to get creative to reduce the risk of labor migration after a sale. Buyers may also get caught up in the retention game by offering retention bonuses to key personnel who stay after an acquisition.
So, here I “stand” before you saying, “If you survived the pandemic, you certainly should be able to handle about anything.” I hope we don’t encounter something worse than COVID! But, if we do, remember, Look Up, Buckle Up, and Stay “Up!”
No matter what stage your business is in, keeping watch on interest rates, consumer spending, and unemployment will help get you through.
Earl Gregorich has been an entrepreneur for over 20 years in e-commerce, business services, and consulting. He is an experienced business counselor with over 15 years of working in the government and private sectors.
He is a three-time recipient of Leadership and Mentorship awards in entrepreneurial counseling and has also received the Small Business Administration's Small Business Champion of the Year for his support of Veteran Owned Businesses. Learn more about Earl at LinkedIn.