“There is an old joke among economists that states: A recession is when your neighbor loses his job. A depression is when you lose your job.” -Anonymous
OK, OK - I‘ve already been taken to task for using the “R-word” in this space when, technically at least, the U.S. isn‘t in a recession (defined as a decline the U.S. gross national product or “GNP” for two consecutive quarters). And I‘ve also been told rather bluntly that continuing to use the “R-word” can become a self-fulfilling prophecy of sorts.
All that aside, it‘s pretty hard to ignore the economic troubles bombarding the U.S. right now -- from paying $100-plus for a barrel of oil, a meltdown in the housing market coupled to a total collapse in the value of mortgage-back securities. Just look at the fate of the venerable 85-year old investment bank Bear Sterns: worth $20 billion in January this year (a scant 10 weeks ago), J.P. Morgan bought it lock, stock, and barrel for a mere $236 million this week, with the Federal Reserve guaranteeing the value of Bear Stern‘s mortgage-back ed securities holdings in the bargain.
Yet the fate of Bear Sterns also shows the flip side of a downward economic slurge - those that have husbanded their capital can reap some big rewards. Call it “vulture capitalism” if you like, but J.P, Morgan just got one heck of a deal - and many other businesses, even in trucking, may be in a position to make some similar gains if they play their cards carefully.
As usual, Professor Jerry Osteryoung of the college of business at Florida State University has some thoughts on this subject. So I am going to lay off digging my own hole on this sensitive topic to let him fill it back in for me. Professor Osteryoung, the floor is yours:
“With the economy slowing down and probably moving into a recession, you must take caution as sales for most firms are going to be reduced. However, a number of positive opportunities that were not available before will be coming out of this recession as well.
The number one positive by-product of this recession is that loan rates are falling dramatically. Now is the time to look into refinancing all of your assets. Whether you have short-term or long-term debt, now is the time to secure a much lower rate. Look at all your assets, from car financing to building mortgages, and consider refinancing them. Just a 2% decline in rates on a 15-year loan of $100,000 will save you about $100 a month or $18,000 over the entire loan period.
Another thing to consider in this economy is buying a building for your business. With both property values and interest rates falling, the real estate market for commercial property is getting softer. It is almost as if this is the perfect storm (in a good way) to buy commercial property. We just may not see this type of buying opportunity again for many decades. Additionally, you may be able to afford a much larger building now that these two elements are being driven down.
Many firms are too heavily leveraged with debt to survive the falling sales of a recession. This is another perfect opportunity to step up and acquire some of these firms to gain market share at a very reasonable price. There will also be more business bankruptcies, which presents yet another chance to acquire some very inexpensive assets. Normally at a business liquidation auction, the average price is ten cents for every dollar of cost.
Another function of a slowing economy is that firms often let good employees go, as they can no longer afford the overhead. Consequently, if you can afford it, this is a perfect time to bring on some great new employees that would otherwise be unavailable. This labor surplus will last mainly during this year, however. Once the economy starts to improve around the middle of 2009, you can expect the labor supply to be very tight for the next five years.
Finally, the last thing that you can do is look at every vendor contract to see if you can negotiate better prices. Like you, most of your vendors are seeing their sales slow and will want to maintain their customers at almost any cost. If they have to choose between a price reduction and losing you as a customer, they are going to give you the price reduction - so long as it is within reason.
While sales and profits will be negatively affected, recessions present a number of business opportunities, from property acquisitions to price reductions. The key is to go out and find these opportunities, then take advantage of them.”
Good advice, as always, from someone who‘s been there and done that over the course of his career listening to and teaching a wide variety of business entrepreneurs.
You can reach Professor Jerry Osteryoung by e-mail at [email protected] or by phone at 850-644-3372. All of Dr. Osteryoung‘s articles, by the way, can be found in a searchable form at www.cob.fsu.edu/jmi.