Starting up in a recession

Recessions bring about change, and that’s the perfect environment for a new business.

Recessions bring about change, and that’s the perfect environment for a new business.

Recessions bring about change, and that’s the perfect environment for a new business.

The UK government is likely to borrow between £175 billion and £200 billion this year. Effectively, 30 per cent of our total public expenditure is not being funded by current taxation.

This means higher taxation for all of us as well as drastic cuts in public expenditure. So if you think 2009 was hair-raising, 2010 could be just as rocky a ride.

But if you are at the head of a growing company or looking to start a new one, the odds might not be as stacked against you as you first think. When I set up Elderstreet Investments during the last recession in the 1990s, there were a number of plus points for my business.

For a start, you can get much better deals on your office accommodation. Not only will landlords be flexible on price, offering rent-free periods, but key liabilities such as long leases with onerous covenants are not required. And you can ‘office share’, leasing a floor or rooms from a larger company that has downsized and therefore has excess office space.

In a recession, large companies are also more likely to take a risk with new suppliers as cost reduction becomes a priority for management. A smaller, entrepreneurial concern should be able to prosper here by offering better prices and demonstrating that it can provide the right level of service. It’s a real chance to win new business in places where you never thought you could compete.
Another area on which to capitalise during a recession is people. In times like these, really good people become available, and they tend to be more reasonable about their salary demands. After all, they may have just received a redundancy cheque and simply want to work rather than holding out for their old remuneration.

People’s attitudes in a recession change. No longer are redundancies considered a sign of weakness, so reducing your costs is easier. Staff will also be more flexible, willing to work longer hours and cover for others. It is amazing how nearly three million people on the dole can focus people’s minds.

Remember that prices are generally cheaper in a recession, so look at all your costs and try to negotiate with all your suppliers. This includes payment terms – don’t forget that HMRC is also more sympathetic about delays in PAYE and VAT.

And don’t just analyse your own business. Other small companies in your sector are more likely to consider an acquisition or merger. Of course, both sides have to be more realistic on price but the potential for cost reductions in the merged business is a major driver for a deal to be done.

Interestingly, a recession also creates new market opportunities. The DIY store B&Q has just announced great results because people are not moving house but are instead staying indoors and improving their current homes (and hopefully their value too).
Another of my companies provides compliance software for large corporations to audit their software agreements. Because Microsoft, Oracle and the like are finding new sales tough, they are now monitoring existing user licences more closely – hence the need for companies to avoid paying penalties or fines for non-compliance or even overpaying for ‘seats’ where people have been made redundant.

Look at your marketing strategy and see if there are areas that have now become more relevant. For example, look at Europe again. The value of the pound has dropped so dramatically in the past nine months (over 40 per cent) that doing business there may well now be feasible, as well as profitable.

Good luck, and always think positively.


Michael Jackson

Michael founded Elderstreet Investments in 1990 and is its exec chairman. He was also chairman of Sage, the FTSE-100 accounting software group, until 2006. He is a specialist in raising finance and investing...

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