Insights

3 Surprising Reasons Why A Recession May Be The Best Thing For Your Business

Monday 12 December 2022

When it comes to finance, the mainstream media has been all doom and gloom recently.

As fears of recession build, people start to get nervous about investment and the markets. To a corporate mindset it can be tempting to hunker down and stop spending until the storm passes.

Here at EHE, however, we have been talking about the silver lining to recessions: despite what is in the news, there are good things to look forward to and opportunities to be seized. Guy and I discussed recessions recently, and why they are not the problem that people sometimes present them to be, on our podcast Extraordinary Entrepreneurs Together.

As grey-haired entrepreneurs, we have been around for a few recessions. Guy started a business at the end of the dot-com boom in 2001, I had the unenviable job of raising millions of pounds for a real estate company in 2008, and we have all recently come through the Covid-19 pandemic. In every case, I have seen for myself that recessions are one of the best times for an entrepreneur to grow fast.

Guy: “The dot-com boom was probably the worst possible time to start a business, but I did it. It ended up being successful despite the recession. We never ever lost money. Every single year, we made money and we grew – even through the dot-com bust.”

I am not some independent visionary or genius for thinking like this. Part of this is thanks to having read a book by Warren Buffet, CEO of Berkshire Hathaway. He is recognised as one of the most successful investors in the world – currently worth $109 billion. He has been in business for a long time now and he clearly knows what he is doing. His attitude to recessions is to embrace them as an opportunity to go all-in and start investing.

There are three reasons, in my mind, why it is such a good idea to start investing and putting money and resources into businesses during a recession:

1) Recessions are temporary. If you look at every single recession over the last 100 to 150 years, while they might last anywhere from six months to six years, we do eventually come out the other side.

2) Otherwise successful companies become devalued. The recession itself might have nothing to do with the value of a company, but the weaker market devalues it regardless – once the recession ends, this value will recover quickly.

3) Banks stop lending. For entrepreneurs and private investors, this is a fantastic opportunity! Without the banks, companies will have to look for other sources of funds.

The market is artificially weaker

If you look at what is weakening the market right now, you will see that it is a combination of the response to Covid-19, the Ukraine War, and energy prices being driven up. As a result, inflation has gone nuts. What does this have to do with most mainstream companies? Nothing!

A company does not become a bad company overnight. These are still great companies with amazing products and services. It doesn’t matter if they are big companies or the smaller companies that are ready for high growth.

A good entrepreneurial mindset recognises this: that a good company is still a good company. A good company in need of investment will still be able to grow and develop. If we, as entrepreneurs, invest through this cycle, those companies will come out the other end without their potential and value having changed.

This means that now is a fantastic time to make strong acquisitions in good companies – the price of buying into them is a lot lower than it would otherwise be.

As a business owner, don’t panic

As someone running a business, rather than an investor, it is easier to get your head turned and to start worrying. Maintain a positive mindset, stay calm and look at the logic. 

During Covid-19, I had an entrepreneur come to me with a company that had been doing very well before the pandemic. He was starting to lose his bottle a little and wanted some cash return – just in case. He offered me 25 per cent of the company! Fortunately for him, I talked him out of this, calmed him down and helped him look at the logic.

If he went to the government with this great company, he could probably get £60–80,000 from them without losing any shares. If he did this and still had trouble, then I would help him. He went away and got this support from the government, which was exactly what he needed. These days, his company is in great shape and he hasn’t lost any shareholding.

It might happen that your income might go down and your company might need to retract, but still keep an eye open for opportunities and ways to benefit.

During Covid-19, many businesses needed to do just this. Coffee shops needed to keep selling, so they pivoted from selling coffee as an in-person venue to selling coffee machines and running a coffee bean delivery service. Restaurants began providing delivery and takeaway services, which are still part of their business and providing value now that the pandemic is over.

Even bigger companies benefit from this approach. Recognising that luxuries like perfume or alcohol were in lesser demand, producers adapted to the situation: distilleries and even Louis Vuitton began producing hand sanitiser.

Another panic reaction Guy sees is companies reducing their marketing budget. We believe that when you look at the logic, a recession should in fact be a time to increase the marketing budget!

Guy: “In a recession, you want to spend more money on marketing. The reality is that there is less noise in the marketplace – people aren’t doing advertising, updating their websites, or changing their messaging. They’re spending less money on this in general.

If you spend more money on marketing at the time when there is less noise, you are going to be heard. Chances are, even if there is less business, you are going to win the business that is out there, because you are making more noise and sending out the right messages. 

On top of that, you are also positioning yourself in the right way to come out of the recession. You will be the company that people turn to when they do want to start spending more money on the services that you offer.”

If you can grow your business during a recession – a time when naysayers might say it is impossible – you will create the perception that you are a strong company to consumers. This will make them more likely to trust you in the future.

Embrace growth

Of course, bank debt is preferable to private equity. However, in recessions, banks pull up the drawbridges. You still need money to grow and survive, so take the private equity opportunity when you can – you can always borrow from banks later when interest rates drop and borrowing is easier.

During the 2008 housing crash, I ended up raising millions of pounds at a time when the bank was refusing to lend. We had plots of land worth £50,000 each – the surveyors didn’t want to know. They were valuing the plots at £0 because no bank would lend money.

In the end, we found a private investor who lent us millions of pounds to build. Yes, the interest was 10% and the debt is still with the company today. However, without that loan, the company would not have been in the strong position it is today – it might not even have survived. Thanks to that loan, we were able to grow and develop when nobody else could have helped us!

Stay positive and find a supportive community

So, to everyone reading this: recessions are not all doom and gloom – despite what the media might say. Recessions represent a fantastic opportunity to not just survive, but thrive as a growing business. The key is keeping a positive mindset and looking for the benefits.

Part of this is surrounding yourself with other like-minded people and being part of a supportive community. We and the EHE community at large have all been there, done that, and we have the t-shirts when it comes to recessions, and we are all about helping each other. 

If you have any thoughts on weathering adversity and embracing opportunities as an entrepreneur, we would love to hear them! Join our community of entrepreneurs to be part of the discussion around all things to do with business growth, and drop us a line if you’d like to learn more about the specific support we offer at EHE Capital.

 

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