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How Businesses Should Respond To The Economic Downturn

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As businesses report a slowdown in sales, a weakening in their financial position, a series of corporate restructuring and job retrenchments, many economists and analysts are predicting that the US will enter a recession in the next 12 to 24 months.

This reminds us of the recession of 2008-09 that have occurred nearly a decade ago, which is still a painful memory for many entrepreneurs. Unfortunately, economic downturns are a fact of life and are cyclical when you’re running a business.

But keep in mind, a recession will happen to everyone. You will not be the only one affected. What determines your success in business (or for that matter in anything else) is not what happens to you; it is how you respond to what happens to you. Any economic changes that happen and impact your business will impact others in your industry as well. So how fast and how well you respond will determine your success.

“Life is ten percent what happens to you and ninety percent how you respond to it.”  — Lou Holtz, former American football coach and author.

The difference between winners and losers is how they react to any changes in the business environment, including harsher economic conditions. That is why some companies are able to benefit competitively during and after a downturn, while others may not be able to survive.

But the question is, what should you do when there is an economic downturn?

In my point of view, the best offence is, well, to attack. In short, I am suggesting that you should grow your business. I know you think I must be a little mad, but that is what I would suggest that you do. Once you have the mindset that you should and you can, the rest is just finding the means to do that.

If you are prepared, a recession can present a rare opportunity to grow your business as you can buy cheap stocks and assets, as well as acquire your competitors’ customers from companies that are shutting down their businesses.   

So how do you grow? The best way to grow is to collaborate, acquire or merge with your competitors.

  • Collaborate To Create A Win-Win Situation

Collaboration is a way forward. The smart businessman will take advantage of the downturn to conduct a joint marketing campaign on certain products with their closest competitor to corner both your product’s market share. However, if both of you have a directly competitive product, then it could be more difficult for you to market your products together.

But if the competitor has a product you don’t have, or you have what they don’t have, then it is possible for both of you to do a joint marketing campaign to sell the products. For example, you and David are property agents, you sell property in location A, and he sells property in location B, then you can hold an event to sell the properties together.

Business Collaboration

Collaboration doesn’t necessarily mean you need to work with your competitors, but you can collaborate with the people who have the same target market as you, rather than just focus on your existing products and customers. That is called leverage marketing.

For instance, you sell your product to other people’s customers while you also sell other people’s products to your customers. You don’t necessarily need to share your database as you may need only to exchange products for mutual benefit.

  • Merger and Acquisition To Enhance Value

Merger and acquisitions during a recession can actually create greater value. The ‘entry price’, the cost of gaining access to the stream of cash flows, market segment, capability and synergies from the acquired business is often much lower, as companies are shrinking or shutting down their business. Meanwhile, there is also less competition for acquisition and thus, fewer companies bidding up the price.

You either merge the business activities, or you merge the whole company, it would depend on your company’s strategy.

However, the best way to do a merger and acquisition is when you’re a listed company for two reasons. First, you can use shares to acquire a business or company instead of using cash to make an acquisition. So, you can reserve your cash to run your business operations.

IPO

Secondly, public listed companies have a higher value compared to private companies. Basically, a private company is valued based on the historical and present value from financial accounts, while a listed company is based on their present and future value. The listed companies can then liquidise their fixed and tangibles assets, as well as the human capital to strengthen their values.

Also, a private company is harder to get value justification compared to a PLC. The market determines a listed company’s value and the share price will reflect the company’s value openly. For a private company, might need to hire a valuer to justify the value. Otherwise, it’s tough to convince other people the value the business has.  

When it comes to a merger or acquisition exercise, the value of a company is very important. If your company have a high value, you can use lesser shares to do the exercise.

For example, you own a PLC with USD10 million of market value, and you want to acquire a company valued at USD1 million (same as the selling price), then you just need to issue 10 per cent shares for the acquisition.

  • Buy Cheap Stocks and Assets

Recessions can present an opportunity to buy stocks and high-quality assets on the cheap.

YTL Corporation Berhad, a conglomerate running multiple businesses, including utilities, property development, as well as hotels and resorts, is a typical example which loves to acquire assets during an economic crisis.

When everyone steered clear of the property market during the 1998 economic crisis, the group acquired properties on Kuala Lumpur’s prime shopping district, Bukit Bintang, also known as the Golden Triangle. They acquired Star Hill Shopping Centre, Lot 10 Shopping Centre, and the JW Marriott hotel for a modest sum of RM323 million, a huge discount from the properties’ net book value of more than RM800 million.

Do you know what today’s value of these properties is? According to YTL Corporation and YTL Hospitality Reit’s 2018 annual reports, the combined value is more than RM1.5 billion.

Lot 10

Then again, in the 2008/2009 economic crisis, the group made a clear intention to buy assets from distressed owners. They planned to utilise their war chest of some RM12 billion for assets acquisition as they saw the opportunities opened up by the economic crisis.

  • Take Over Competitors’ Customers

Acquiring new customers isn’t easy, but you can acquire and take over a group of potential customers immediately from your competitors who want to shut down their business during the economic downturn. Do you need money to take over customers from a distressed competitor? Not necessarily; you can always share the results or “rent” his customer database or set up a division which he can “participate’.

Saving marketing costs and time to expand your customer database is a key advantage of taking over the customers from your competitors.

The key is your ability to work out an arrangement that will only benefit your business but also provide a solution and a benefit for the other party.

  • Take Over The Business To Strip Their Assets

The economic downturn is a good time to take over the business from a company that is not in a good financial position, and you can leverage their assets to run your business.

From what I’ve heard, there is a local F&B company in Malaysia which sells “pan mee” that specialise looking for F&B outlets that have closed or closing down. They grew by taking over the location with its ready fittings and furniture; hence at ‘closing down’ sale. Because these outlets are fully renovated, furnished and equipped, so the company need not spend too much money to renovate. Once they take over the restaurants, they can move in and run their business quickly. This is a smart and interesting business expansion strategy.  

Your Business Can’t Grow If You’re Not Well Prepared

There is no denying the fact that an economic downturn can be ripe for acquisitions, expanding your capacity or open new markets, but you need sufficient resources to do these activities.

So, what you should do is to plan. When you see an economic downturn is coming, you should start to accumulate cash and liquid resources. Also, keep in mind that you should avoid spending your resources into on “sunk cost”; expenses that once spent cannot be recovered and that cannot be quickly converted back to cash, such as renovating an office.

You have to be careful with business expansion during the downturn if it requires a lot of liquid resources, including resources like cash on hand or accounts receivable.

Negotiate longer credit terms

When the business environment looks bleak, everyone will try hard to seize any business opportunities. If you have a good and sustainable business, you will have greater bargain power to negotiate longer credit terms with your suppliers during an economic downturn.

Cash is everything in downturns. If you run out of cash during the downturns, your business will be unable to survive. Negotiate longer credit terms is a way to manage your cashflow better, in order to weather the challenging economic condition.

Shrink Your Business To Survive In Downturns

During an economic downturn, there are pressures for businesses to reduce costs. If you’re facing financial or cashflow issues, then you might need to shrink the business or division that does not give you contributions. You can identify which business you want to shrink based on financials and studying both long term and short term implications in terms of financial contributions and growth potentials.

Under this exercise, you might move those more productive staff to your core business and remove those staff that are not productive. This exercise is to help you refocus on your sustainable core business.  

In these two years, many multinational companies had started to shrink their businesses. Some have announced a pullout from their overseas operations and are implementing retrenchment exercises, such as US carmaker Ford. The company has planned to reduce its global workforce by 10 per cent by the end of August while global tech giant IBM has also shut down its technology park in Singapore.

Ford
Image via BBC.

Since the global economy is slowing down, it’s time for you to relook your business strategy and determine how are you are going to respond to the possible economic downturn. Recessions are golden opportunities for growth.

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