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Friday, January 04, 2008

The 80/20 Rule -- and Surviving (thriving) during a recession

Image from Inman Blog: The Inside Track on the Real Estate Industry -- and a posting reporting that newly constructed homes are now selling at a discount to resales -- a sure sign of problems in the marketplace.

You have to be pretty thick to deny the economy is turning south, and fast, at least in much of the U.S. (Parts of Canada such as Alberta are booming and Ottawa -- being a government town, is somewhat immune from recession.) A sign of the times: Yesterday, I received a call from Florida from someone wishing to become a new local publisher for us. His business flipping homes had failed. When small operators get into real estate in a big way you know you are nearing the end of a boom cycle.

So, what should you do?

Motivational guru Brian Tracy and the late Walt Hailey taught me an important concept. They said: "Imagine the worst possible situation, where 70 to 80 per cent of the population is without work. Who would have the jobs? -- the 15 to 20 per cent who are the best at what they do. So make sure you are in the 20 per cent even in the best of times."

The world of course is never perfectly fair. Incompetents sometimes are 'protected' and talented people lose jobs or businesses in hard times. The difference is the talented individual can usually rebound and find another answer. As an example, if you are really good and are laid off your employment, now may be the best time to go into business for yourself. You won't have the overhead of the 'big guys' and you'll know your stuff and maybe even have a few customers to serve already -- so you are ready to start!

Of course, as I've written several times, the talents within your trade are not the same as the talents you need to run a business. You need systems, processes, common sense, and a whole lot of business management skill to do it right. But I wouldn't let these limitations stop you. You can learn these skills and if you really enjoy and love your trade, you'll find a way to solve the other problems.

Now, say you are the business owner and things are turning desperate. Here, you need to avoid the biggest mistake people make when things go bad -- behaving like an ostrich. You need to face the music, and do what needs to be done to set things right, and you need to get to work on the problem now.

Your good options are: Reduce costs, increase revenue, or do both. You have another two dangerous options: Increase your debt or 'invest' more capital (personal or investor funds) to make the business work.

Let me deal with the latter two options first. I think it is truly dangerous to pour good money after bad -- before you rationalize and justify this type of action, consider it VERY carefully. Yes, there are some situations where applying more resources to the problem will pull you over the hump, but you need to be absolutely certain this is the right thing and when the economy is going the wrong way and you are trying to stay afloat, I'd be very cautious. (If you are thinking of a start-up, by the way, I am advocating a low or no-capital start up. Use your sweat equity, not your cash!) Be especially cautious if the bank or your suppliers ask you to secure your debts with personal assets or guarantees; you may have no option, but it is probably wiser to reduce your debt than to sign these papers.

Now, if you need to fire/lay off employees because of economic circumstances, or if you see down the road (hopefully not imminently) that you may become insolvent, waste no time in finding professional legal advice, now! In the former situation, the problem is that even though you may be justified economically in asking employees to leave, you must beware of anti-discrimination laws and the possibility of an ex-employee going after you. It happens (especially in hard times.) In the second situation, if you think you have a risk of insolvency, seeing a qualified lawyer well in advance may help you protect personal assets and mitigate the losses. IF you wait until the last minute, you will be screwed as courts will overturn last-minute asset transfers, etc. Best of all, if your advisor is good, he or she may be able to suggest alternative solutions. (Yes, a little more than a year before we 'hit bottom' I sought the advice of a bankruptcy expert/lawyer -- we made some changes to pay off what appeared at the time to me to be a 'safe' form of 'unsecured' bank debt - the lawyer showed me how this debt really would have left me with much personal liability. A sign that I had indeed weathered the storm was the day I repaid the lawyer in full -- and we have now cleared down most of the other major business debts, paying everything owed, without needing to file papers.)

Finally, you should appreciate that in hard times, the most 'secure' job you can have is likely to be your own business, at least if you know how to keep things in balance and are ready to do what you need to do. I've heard of contractors weathering really severe storms by doing small-scale maintenance work for existing clients. They lay off all their employees, but are able to maintain their own personal income.

  • Be sure you are spending most of your time and effort doing what you are really good at -- Remember, even in the hardest times, the 20 per cent at the top will survive; even thrive;

  • Don't bury your head in the sand -- you will need to make changes. Cut costs, increase revenues; do what you need to do, without delay.

  • Seek professional advice well before you 'need' it -- this is especially the case if you must lay off or dismiss employees or you think an insolvency is possible down the road (don't wait until the last minute for this advice).

  • Self-employment is often an excellent form of security in hard times; if you are good at your work and fear you are about to lose your job, consider it as an option -- just do it without significant (none is best!) capital investment.
Next week, I will begin digging deeper into the real world of the economy and its impact on the trades. Bob Kruhm in North Carolina has asked me to write a story on the trends and how contractors and construction businesses are adapting; and this fits in line with some impending SMPS Marketer assignments. And since I enjoy writing and am good at it -- I'll gather some intelligence that will be hopefully be helpful for your business.


Anonymous said...

Thanks for the well written article, Mark. As a small debris hauler thinking of becoming a small demolition contractor I appreciate your advice on starting up with sweat-equity and no or low capital.

Construction Marketing Ideas said...

Best wishes. One idea I've found works for many is to seek out communications/relationships with peers in other communities similar in demographics to yours, but where the business owners would not be your competitors. You'll gather insights and share common stories -- and may be able to trade leads and sources.
This is possible through trade associations or, simply, internet searching!