It looks as if 2008 could be a very tough year. Oil prices have been going through the roof, the dollar has fallen to all-time lows against the euro, and worrisome signs of inflation have begun to appear. Worst of all, the biggest economic clouds, the subprime lending crisis and the deterioration of the real estate market, are casting troubling shadows. Little wonder that many economists and corporate chieftains are less than thrilled with the economic outlook and exude levels of pessimism not seen in years. But entrepreneurs see the world through a different lens. In fact, many of them are as optimistic as ever.
To get a sense of how top-performing small businesses are positioning themselves for a downturn, we spoke with five entrepreneurs whose companies have ranked in the top five of the Inc. 500 over the past decade. Some of these CEOs are still running the same fast-growing companies, which are now each approaching $100 million in revenue; others have sold those businesses and have started new ones that are picking up momentum. What these people have in common is a sense of confidence that, if it's played right, an economic downturn can work in their favor.
"I am not a woe-is-me kind of guy," says Kevin Grauman, who founded the Outsource Group, which was ranked No. 1 on the Inc. 500 in 2002 (and was subsequently sold), and now owns Emportal, which sells a suite of Web-based human resources tools. Grauman is as busy as ever cold-calling midsize companies to pitch his online work force management applications, which help track employees, contractors, and vendors. "These troughs in the economy are out of your control, so you have to look at what you can control," Grauman says. What he can control, he figures, is coming up with an innovative, cost-effective technology to help companies track their far-flung work forces. "I think there are many more opportunities today than there were a year ago, and if you can open your mind to the opportunities, you will do well regardless of what the economy does."
Though the other CEOs we interviewed were a bit more worried about an economic downturn than Grauman, none are planning to lay people off, close up shop, or scale down their businesses. Instead, some are looking to profit from other companies' outsourcing. Others are making the most of softening real estate prices to open new locations. And one is expanding overseas to lessen the effects of a possible recession at home.
It's a truism of economic cycles that they don't treat every company the same way. Tariq Farid, founder of Edible Arrangements, a Wallingford, Connecticut--based franchiser of stores that sell fruit and chocolate arrangements, plans to expand no matter what happens in 2008. He's looking to add 200 locations to his existing 800 and to launch a national advertising campaign for the first time. "If you think the sky is falling, it's falling," says Farid, who started Edible Arrangements in 2001 and led it to No. 4 on the Inc. 500 in 2006. "We plan to gather market share while times are tough."
Chances are that plenty of people will also be looking for work. That, too, meshes with Farid's ambitious growth target. The rising number of layoffs from big corporations has meant an increase in the number of former managers who are interested in becoming franchisees. These former corporate types usually have no problem getting financing for the roughly $200,000 required to launch a franchise. The softer real estate market, moreover, means there are more retail locations available in hot neighborhoods at better prices. Finally, though a decline in overall consumer spending is making many retailers nervous, Farid figures that even if consumers cut back on big-ticket items, they may actually spend more on such small pleasures as a basket of chocolate. "People will still have birthdays and anniversaries, and people will still be in love," he says.
What's true for chocolate is also true, it turns out, for silicon. Sunnyvale, California-based eSilicon, which designs and manufactures microchips for such customers as Microsoft (NASDAQ:MSFT) and Kodak (NYSE:EK) and was ranked No. 3 on the Inc. 500 in 2005, is similarly gaining from a slower economy. Big chip makers already outsource chip design, and eSilicon's CEO, Jack Harding, expects the trend to accelerate in 2008. Once a company starts outsourcing, moreover, it tends not to bring the function back in-house, he says. What's more, larger chip companies often overreact to slowdowns by cutting their own staffs too deeply, only to call up companies like eSilicon in a panic with a rush order. "Decisions are more reactive and short term," Harding says. "We have people calling us and saying, 'Will you take over this product midstream?' " This "emergency outsourcing," as Harding calls it, accounted for as much as 20 percent of eSilicon's $80 million in sales in 2007.
For CEOs worried about a slump in the domestic economy, there's always the option of heading abroad. This option looks especially appealing amid signs that the global economy no longer lives and dies on the strength of the U.S. economy. Dan Weinfurter, CEO of Capital H and former CEO of Parson Group (the No 1. Inc. 500 company in 2000), is one of those small-business executives looking overseas. Last year, Chicago-based Capital H, which helps companies hire and manage staff, acquired a London firm specializing in executive coaching. The London company had sales of $20 million in 2001, so it was a big bite for Capital H, a $50 million company. The move was designed, in part, to buffer the coming downturn in the United States.
Weinfurter says he began worrying about the economy in early 2006, after trying to sell his family's house in suburban Chicago and seeing it languish on the market. (It eventually sold after a year and a half.) He repositioned Capital H to focus on profits rather than sales, a turnabout from how he'd run Parson Group in the boom years. "My view of the economy has become a bit more conservative, and I have become more conservative in how to grow the business," he says. "If I would have been smarter a year ago, I would have changed strategies sooner and emphasized profitability over growth."
Andy Paff, CEO of Cedar Point Communications, a voice over Internet telecommunications company that ranked No. 2 on the Inc. 500 in 2007, is in a very different business but is taking a similar tack. With new markets in Latin America and Europe "starting to pop," as he puts it, the company expects to increase its overseas revenue to 30 percent of total sales in 2008, up from 5 percent in 2006. "The idea," Paff says, "is to diversify the revenue and diversify the product. It is not a time to turn back."