Cambridge Chamber of Commerce

Throughout much of last year, economics firms predicted Canada and other western nations would fall into recession by the end of 2022 or early 2023.

 

However, even though the latest data shows these economies have been somewhat more resilient than expected, finance experts are expecting a recession will begin a little later than originally thought.

 

We reached out to Chamber Members Jason Kingston and Kris Yungblut, partners at the accounting firm Grant Thornton LLP, to get their input on how to run or buy a business during a recession:

 

 

Q. Is buying a business during a recession something worth pursuing and what are some of the factors that need to be considered?

 

A. There are always good businesses out there, and some are even, ‘recession proof’. The key is to understand the fundamentals of the business, in relation to what is driving the recession. Looking to acquire a business during a recession can in some cases present attractive pricing opportunities.

There are a number of factors to consider:

  • Proper purchase price structuring and availability/cost of financing the acquisition.
  • Generally, value multiples will come down during a recession. It is important to consider if the multiple adequately reflects the company’s ability to generate sustainable positive cashflow.
  • The macro issues driving the recession, and how they impact the business need to be reviewed and understood.
  • The fundamentals of the business, and how the recession pressures impact them.
  • The impacts of the recessionary environment on the company’s suppliers/customers. Will customers keep buying or delay their orders? Will customers be able to pay on time? Will suppliers have products available?
  • The company’s ability to generate adequate cash flow to make payments, as needed (i.e. protect the company) OR to take advantages of opportunities that come up because of the recession (i.e. grow the company).
  • Are there opportunities to do things more efficiently and/or take costs out of the business?

 

 

Q. What kind of strategies are needed when it comes to operating a business during a recession?

 

A. There are several strategies business owners and senior management can look to during uncertain economic times. Some of these would be different depending on where in the business lifecycle (start-up, mature, etc) the particular business is, but many are common to all businesses. Examples of these would include:

 

  • Improve cashflow of the business. This can be through reducing cash going out, such as not ordering large quantities of unnecessary supplies to have on hand or cancelling unnecessary subscriptions or getting additional cash in the door through the sale of redundant assets. The important thing to remember is that expenses should only be reduced if doing so does not harm the business and its ability to operate.
  • Review larger strategy initiatives and the actions needed to meet the strategies. Ensure that only those activities which will have a clear impact on the achievement of key strategies are invested in, taking a less is more approach. For example, if pursuing multiple new product offerings, take the time to realistically project the potential sales volume of each product and its contribution to the gross margin of the business and focus on those which generate the best return on investment.
  • Prepare budgets and financial forecasts. Cash forecasting can allow a business to better understand how and when cash is received, as well as the impact of investing in new equipment and machinery. Strong budgets and forecasts give the business owner the ability to engage in scenario planning and adjust quickly as cash needs and opportunities change.

 

 

Q. Are there any steps a business owner can take in advance of a recession?

 

A. Before the onset of a recession there are several things a business owner can do. Some of these would be good business strategy regardless of economic conditions, while others are more situational.

One planning exercise that can be done is creating a cost adjustment checklist. This would be an analysis of costs which can be reduced should times get tough. During good times there is no imperative to act on the checklist, however, when the tides are turning having already performed the exercise the owner will be better prepared to act and follow through with the cost adjustments they need to implement.

Other items which should be considered is looking at debt load being carried and renegotiating, if possible, to reduce strain on cashflow. Proactively reaching out to key customers and ensuring a strong relationship exists is a must. If you are a key supplier to another business this can give them peace of mind that you yourself are taking steps to prepare for a recession and are less likely to disappear than others who are not planning appropriately.

 

 

Q. Can a recession ever be a positive thing for a business?

 

A. While I don’t think I would ever make a blanket statement that a recession can be a positive thing for a business, there are clearly some opportunities and positives that can come out of a recession.

To survive a recession, most businesses will need to look at cost cutting measures as well as how to improve operational efficiency.

These actions can have longer term positive impact on the business, as the efficiency gains will continue as the economy improves, and while previously curtailed spending may be reintroduced, there will almost inevitably be spending that was eliminated that will end up not being missed and therefore won’t be reintroduced.

There can also be other opportunities to take advantage of during a recession. An example would be discretionary spending on customer acquisition, which is a commonly cut expense. Companies who have or develop a low-cost marketing plan to get potential customers attention may be able to grab market share while their competitors cut their advertising dollars.

Finally, once things improve, there may be less competition in a business’s market. If competitors were less prepared to survive a recession, they simply may not, and that leaves available market share for those who did survive.

 

 

Q. Are recessions just a natural part of the business cycle?

 

A. Recessions can be caused by several factors which impact the economy, such as a financial crisis like what was seen in and around 2008 and 2009 or the early 1990’s recession, the primary factors for which are believed to have been restrictive monetary policy and loss of consumer and business confidence.

Recessions do appear to follow periods of strong growth and are often viewed as inevitable, though there are some alternative theories into the causes of recessions which would argue against the inevitability of them.

However, history seems to be on the side of recessions occurring. As such, I think it only prudent for business owners to regard recessions as a regular part of the business lifecycle, to be aware of the indicators of recession, to have plans in place to help ensure their business survival during the recession and to set themselves up to thrive as the recession lifts.

 

 

 

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