For Some, Recession Presents Opportunities

For some, it’s, ‘What, me worry?’

As recession fills many companies with worry, others realize how many opportunities it could present them

Business Courier of Cincinnati – by Jon Newberry, Staff Reporter

The fear of a deep and prolonged recession might be casting dark shadows on Wall Street, but Dave Dillon sees the bright light of opportunity amid the gathering clouds.

Addressing grocery industry analysts last month in Cincinnati, Kroger Co.’s chairman and CEO sounded almost like he would have been disappointed if a major economic slump didn’t materialize. Kroger is not only prepared to weather a downturn, but the Cincinnati-based supermarket chain expects to gain from it.

“In past recessions, it’s clear that some retailers win,” he said. “Our objective at Kroger is to be that retailer. There’s no reason that we should not win big in this kind of environment.”

Dillon cited his company’s mountain of customer purchasing data and the analysis provided by its Dunnhumby USA joint venture as reasons for optimism. He figures it gives Kroger the ability to give the people what they want in a fast-changing marketplace. It’s a strategic advantage other chains don’t have that Kroger intends to fully exploit.

That’s an attitude other businesses can also benefit from as the economy wilts, assuming they aren’t forced to focus all of their energies and resources on mere survival. Accountants, lawyers, consultants and other business advisers say there are numerous ways to make recession work for you.

Seize opportunities

“In adversity, there’s opportunity,” said Jim Donnellon, director at Barnes Dennig & Co. “The good companies, the companies that take care of their balance sheets, there’s a cleansing. They weather the storm, and when they get on the other side there’s not as much competition out there.”

Jim Dressman, a partner at Dressman Benzinger LaVelle, advises businesses to conserve cash but not to be “penny wise and pound foolish.” They must continue to invest enough to keep their competitive edge and maintain market share..

Recessions create opportunities to make acquisitions, possibly into new lines of business. Dressman cited a client (whom he declined to identify) that acquired a struggling company a few months ago at “a very agreeable price.” It made sense because the company produces a complementary line of products that enhanced the buyer’s own line, and it saved a lot of jobs, he said.

Despite all the talk about credit freezing up, financing acquisitions is not necessarily a problem. The deal Dressman cited was financed by a commercial bank, some of which are more interested in making loans than others, he said. Credit standards have been raised, and banks generally want to see buyers put in more equity, but bank money is available, he said

Although long-term, fixed-rate financing has dried up, shorter-term credit with variable rates has not. For businesses with strong balance sheets and solid prospects, that increases their bargaining position, especially with a distressed seller.

Jeff Schloemer, a partner at Taft Stettinius & Hollister, urges clients to take the long view while others are focused on short-term survival.

Morgan said one of the biggest opportunities already on the books is the expansion of Sec. 179 deductions for certain tangible business assets that are put into service in 2008. The maximum deduction was expanded from $128,000 to $250,000 this spring. It can be applied to machinery and equipment, furniture and fixtures, even off-the-shelf software.

Sec. 179 lets a business deduct the purchase price all at once rather than depreciating it as a capital expenditure over the asset’s useful life.

“If they do it now, they can write it all off in 2008. If they wait until 2009, they can only deduct some of it. This is the year you want to do it,” Morgan said.

Donnellon cautioned businesses to not “let the tax tail wag the economic dog. It’s gotta make sense businesswise first.”

Schloemer suggested businesses look into filing for a reassessment of their real estate taxes. People have gotten used to assessments that are lower than rising market values, but with real estate values falling, it’s quite possible that an assessed valuation is too high. Look at what comparable properties have sold for in the same area, he said.

Build relationships

Recessions can work both sides of the street in terms of personnel. They can be a good opportunity to phase out unproductive people who were harder to get rid of when times were good. Conversely, it can be a great time to pick up high-quality, skilled and experienced people who were impossible to find 12 months ago. And they don’t necessarily have to be people who have been let go elsewhere. When companies announce layoffs or other cost-cutting programs, a lot of people begin to worry about their security and consider making a switch, Dressman said. Just be careful about noncompete agreements.

Schloemer advised building key relationships now when people are struggling, because they’ll remember you when business starts picking up again. On the other hand, it also might be a good time to tighten up credit terms and procedures that got a bit loose when times were good.

“All of these things become much more acceptable during a recession,” he said.

Donnellon cautioned against using the downturn to beat down vendors on prices, because times change and they might turn the tables on you later. That happened in the steel industry during the last cycle, and customers who squeezed the steel makers later regretted it when they had to beg for deliveries. “It’s a slippery slope,” he said.

He also warned against cutting costs by accepting lower-quality goods. The lowest price might be the most costly option if businesses end up compromising on quality or have to scrap or rework product that doesn’t meet standards.

Whatever opportunities emerge will depend a lot on how deep the recession is and how long it lasts. Donnellon figures most businesses are still getting a handle on the situation, not yet thinking of the advantages it might afford them.

“I think we’re still in the first days of ‘Where is this thing going?’ Most companies are looking for unnecessary things they can eliminate to cut costs. But once they get past that, the good companies are going to look for opportunities.”

“You can pick up equipment. You can pick up real estate. You can build your customer base – I hate to say it this way – by taking advantage of others’ misery. Inefficient operations can survive when times are good, but they get weeded out in a downturn.”

Rick Sammons, founder and owner of Right Path Business Advisors, cited a Northern Kentucky business that bought a bunch of equipment for 10 cents on the dollar during the last downturn. It had excess space, so it simply stored the equipment and then added production lines as demand picked up.

“They were very aggressive and wound up benefiting a lot,” Sammons said. “They were able to take advantage of companies that needed to sell on the cheap, because they had a good cash position.”

Kris Morgan, a certified public accountant at VonLehman & Co. Inc., said it can also make sense to invest more in marketing when people are hard-pressed for cost-effective solutions.

“Companies may want to cut back, but I might want to lean the opposite way,” Morgan said. That’s especially true if a business has a product or service that can save money. “If you can get your name out there … more people will pay attention during tough times. There are times when you want to be aggressive.”

Another opportunity might be to renegotiate a lease, possibly getting lower monthly payments in exchange for a longer term, Schloemer said.

With so much volatility and uncertainty about future orders and payments, many vendors will be very amenable to long-term deals on favorable terms. A business with a strong balance sheet will be in a strong negotiating position if it can offer steady volume and certain payment.

Exploit opportunities to lock in terms while better terms are available. That can mean better prices or maybe getting an added product or service at the same price, Donnellon said.

Take a bite out of taxes

Dressman advised keeping an eye on any tax incentives that are passed as part of an economic stimulus package. It might be an opportunity to accelerate investments at a lower after-tax cost, including investments in energy-saving technologies, that a business was planning to make later.