Four reasons why now is the best time to build a new business.
Four reasons why now is the best time to build a new business.
There's no better time to start a business than during a recession. Why? Because a recession opens up opportunities that aren't available in a booming economy.
A reader named Kevin wrote to me last summer looking for advice about embarking on his first entrepreneurial venture. He said he had an opportunity to open a branch office for an established document-imaging business that two friends of his had started in another state. They would provide training, equipment, software, and ongoing marketing support in exchange for a percentage of his profits.
The offer was tempting, Kevin said, but he really wanted to be on his own. He'd studied the business carefully, and he felt confident that he could be successful operating independently. Still, it might be wise to start out as a subsidiary and gain some experience. What did I think?
I thought that Kevin was wrestling with an interesting quandary. Before I had a chance to get back to him, however, he resolved the question by himself and moved forward on setting up his own independent document-imaging company.
His second day in business was September 11, 2001.
I heard from Kevin again about two months later. "I'm sure many entrepreneurs are unsure and pessimistic about starting a business in this environment," he wrote. "My experience could be a great motivator for them."
It turned out that Kevin's business had taken off like a rocket. Not only was he getting more referrals than he could handle, but he was finding that starting a business in a recession had some advantages. Equipment, supplies, and furniture were cheap. Experienced sales representatives were plentiful. Office space was available at reduced rates whenever he decided he needed it. For the moment, he preferred to operate out of his home and keep his overhead as low as possible. That way, he could be much more flexible on pricing than his larger competitors could, which gave him a significant edge when he went after new accounts. All in all, he wrote, "starting up in these tough times has been much easier than many people assume."
I'd go a step further. In my experience there is no better time to build a new business than during a recession. Why? I can give you four reasons.
First, a recession opens up all kinds of business opportunities -- especially opportunities to make sales. You can get in to see sales prospects who wouldn't even take your phone calls if times were good. Customer loyalty goes out the window, as companies focus on cutting costs any way they can. If you can help them save money, they'll listen.
Second, as Kevin discovered, a lot of key resources are cheaper during a recession, so it's easier to keep start-up costs low. You can also find the employees you need, and you don't have to spend a fortune to hire them.
Third, a recession doesn't create the same problems for you that it does for your larger, more established competitors. Because your company is young, you're less likely to have developed a lot of bad spending habits. You don't have as much built-in overhead or as many fixed costs as companies that have been around longer tend to have. If sales drop, say, 40% industrywide, you won't be struggling with the kind of tough decisions -- for example, whether or not to lay off longtime employees -- that will be preoccupying your competitors.
So, fourth, you can be more nimble. You can respond more quickly to opportunities that arise. You may also see opportunities that your competitors miss. Unlike them, you're not married to a particular strategy or a particular way of viewing the market. You have the freedom to go out searching for new, untapped sources of revenues, rather than having to focus on protecting the sources you already have.
A good example is the gift-and-souvenir business I wrote about almost a year and a half ago (" Help! I Need Somebody," November 2000). The business was started, you may recall, by an artist named Pat, who did paintings of city scenes and reproduced them on mugs, mousepads, and other such items that she then sold through high-end retail outlets, mostly in the New York metropolitan area.
Pat had originally come to me for advice on dealing with cash-flow problems, but it soon became apparent that she needed -- and wanted -- help growing her business. So I teamed her up with Don, a former associate of mine who is a great salesperson as well as an experienced executive. They were just beginning to experiment with new sales channels when the hijacked airplanes crashed into the Twin Towers and life changed for us all.
For Pat and Don's business, the tragedy had immediate consequences. To begin with, it devastated the city's souvenir industry, which is highly dependent on tourism. With most tourists deciding to stay home -- or go elsewhere -- local souvenir companies faced the prospect of losing 50% or more of their sales in the coming year.
On the other hand, New York City memorabilia was suddenly popular in parts of the country that had never been interested in it before. Seeing a chance to replace some of the lost sales, Don quickly began contacting sales reps in places like Tennessee, Colorado, and Massachusetts. They not only wanted Pat's New York stuff but asked if she could produce similar items using scenes from their regions. So she began to create new product lines.
Meanwhile, something else caught Pat and Don's attention. Wherever they looked, they saw people sporting hats and shirts emblazoned with the FDNY logo of the New York City fire department. Before September 11, the logo of the New York Police Department, NYPD, had been popular, but no one had cared much about FDNY. Obviously, there was now a market for all kinds of FDNY items. Pat and Don wondered who had the license to use the logo on the types of merchandise their company specialized in.
The answer, it turned out, was nobody.
Pat called around and found out that the fire department had a volunteer who was supervising the marketing of official FDNY merchandise. She contacted him and sent him some sample items. He invited her and Don to come in and talk.
The volunteer marketing man was clearly interested in doing a deal. He knew Pat's work and liked the quality of her products. Before giving Pat and Don a license, however, he wanted to test their ability to deliver. He told them they had one week to come up with 3,600 mugs bearing the FDNY logo and the fire department shield.
Fortunately, Pat and Don had a mug supplier who recognized an opportunity when he saw one. A week later they had their 3,600 FDNY mugs, whose quality -- everyone agreed -- was excellent and whose price was competitive. Pat and Don walked away with a license agreement giving them the exclusive right to use the FDNY logo on 29 types of products for the next three years. Assuming they generate enough sales to cover the minimum royalty payments due, their company will triple in size next year and grow almost 600% during the term of the contract.
Of course, most of the hard work lies ahead. Pat and Don still have to produce the items and negotiate the deals with the distributors and retailers that can sell their FDNY products around the country.
The point, however, is that they're now in a position to do all that. They have a tremendous opportunity to build their business, and they got it by moving faster than their larger, more established competitors, who didn't even bid for the contract. No doubt they were too busy struggling with all the problems created by a 50% drop in sales.
I suspect Kevin's document-imaging company is benefiting from the same phenomenon. In any case, his business continues to grow like crazy. "I'm looking forward to appearing on the Inc 500 list one day," he wrote me recently.
Who knows? He just might wind up there in a few years -- right along with Pat and Don.
Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc 100 company and a three-time Inc 500 company. This column was coauthored by Bo Burlingham. Previous Street Smarts columns are available online at www.inc.com/incmagazine/columns/streetsmarts.
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