By Wayne Rivers

We’ve had a long, robust economic expansion since the low point following September 11, 2001. Most businesses –at least those not in distressed sectors like textiles and furniture manufacturing – are as healthy and profitable as they’ve ever been. There are some areas of concern in the economy, most notably a slowdown in the residential real estate area, and the media seems bound and determined to ignore all the good economic news to talk us as quickly as they can into another recession.

We’ve believed for a long time that the seeds of a company’s destruction are sown in good times. What does this mean? It means simply that when times are good companies expand their payrolls, purchase equipment, and enter new lines of business, etc. Because they’re growing and profitable, they lose the discipline and focus they had on expense control and other vital areas when times were leaner. Subsequently, when challenging times come, they must make drastic, painful slashes to their payroll, to marketing, and to capital plans in order to stay in the black. Malcolm Muggeridge once said “we only learn when we’re miserable.” Certainly, when it comes to family enterprises during economic expansions, Muggeridge has a point.

Let’s begin with a disclaimer. We at the Family Businesses Institute are in no way, shape, or form forecasting a recession. We’re very positive and bullish on the economy and the prospects for family businesses for the next several years. This article is simply an exploration of certain bad habits that creep into businesses inevitably during boom times and how to take advantage of recession thinking now.

McKinsey and Company has recently produced a study of 1300 U.S. companies both before and after recessions. They wanted to ascertain the characteristics of companies which best weathered downturns and which emerged in the top quartile of their sectors following a recession. The top performing companies exhibited a set of behaviors from which all businesses can learn. The companies generally had: low debt, strong cash positions, tight cost controls, and timely, wise capital expenditures. These characteristics were to be expected. Perhaps unexpectedly, top performers used economic downturns as opportunities to: buy or merge with distressed competitors, increase marketing and promotion expenditures relative to their peers, and negotiate favorable terms and conditions with suppliers. These characteristics might not seem earth shattering, but there’s nothing more rare than common sense.

Where are the opportunities then for family and closely held businesses in soft economic times? How can family companies apply the wisdom McKinsey uncovered? There are three main areas of opportunity.

The first and highest opportunity is to use poor economic conditions to get the wrong people off your bus and the right people on it ( please refer to the Family Business Institute’s White Paper “Get the Right People on Your Bus” available on our website). If you haven’t been formally evaluating your employees, this is a great time to begin. Depending on the type of job an individual has in the company, develop a one to ten rating scale with ten being the highest score. Put aside the emotions you may feel about these people and be objective. Get rid of your poor performers! They are a drag on your company, other more productive employees, and you as a leader. You’ll be shocked and amazed how much morale and productivity can go up once you get rid of a few bad apples.

Next assess your company’s productivity per employee. This could be as simple as creating a measurable, quantifiable ratio such as gross sales per fulltime equivalent employee (Sales/FTEE) or net profits per fulltime equivalent employee (Profits/FTEE). This type of ratio will give you a snapshot into how efficiently you’re managing your company irrespective of economic conditions. Getting rid of low productivity employees in favor of average to high performers should cause this ratio to jump upward.

In times of economic doldrums, it will be easier to hire top quality talent that it is in an expanding economy with a tight labor market. You may have qualified applicants beating down your door seeking employment. Use the downturn to reengineer your whole recruiting, hiring, and training process. Be much more discriminating in who you hire and how you hire them. Use assessment instruments, thorough criminal background checks, team interviews, give work and skill assessments, and make sure a new hire promises to be both a productive employee and be a good fit from a chemistry viewpoint. Once the new hire is aboard, orient him to the company and give him training in your way of doing things. Otherwise, he’ll have no choice but to employ his past training - good or bad - as he fulfills his job responsibilities at your company.

The second biggest opportunity for family and closely held businesses in a recession has to do with the fact that you’ll have at least a little more time than you did when at your busiest. You should invest your executive time wisely to think strategically about where you and your organization are headed for the next five to ten years. Crystallize and polish your vision for where you want your business to go. Get that extra training you’ve been wanting. Develop your optimum organizational chart for the next growth period; this will allow you to do a type of gap analysis to see what roles you need to fill to have your company at its best. Do employee reviews and evaluations using specific, measurable ratios wherever possible. Review yourself and your role. How much free time (away from the office with no e-mails or phone calls) do you really want in the future? Ideally, how many hours do you want to work per week? How can you work yourself out of the parts of your job you don’t like by delegating, hiring, stopping non-productive endeavors, etc.? How can you spend a greater proportion of your time doing high payoff activities? Invest time and money in marketing, promotion, and sales so you’ll gain market share during and after a recession. This is somewhat counterintuitive because marketing is often one of the first areas cut during soft times.

The third biggest opportunity, assuming you build a stockpile of cash as top performers do, is to recognize that now is the time to deploy the cash in strategic ways. Look for merger or acquisition opportunities. Some of your friendly competitors may be in distress; maybe the “old man” simply doesn’t have the stomach to weather yet another economic cycle. This could be an opportunity for you to buy new territory, new products, new customers, or new employees.

Next, try to negotiate substantial cash discounts with your suppliers who are likely troubled by lower sales and margins themselves. Their collection days are probably up, and since you have cash and are able to pay quickly, you’ll be able to get the best possible terms. Next, make sure your credit and collections procedures are as efficient as possible. It’s easy to let those collection periods stretch out during good times when cash is plentiful; in softer times you simply can’t afford to act as a bank for people who owe you money. Charge late fees, and don’t allow people to take trade discounts inappropriately.

Other than the major media outlets that seem to live for bad news, no one wants to see another recession looming. On the other hand, we all know one is out there somewhere. Why not get ahead of the curve and position yourself to be one of those rare companies which can take advantage of a recession rather than being whipsawed by one? ■