Utah Business Blog

By Dave Young, President of Paragon Wealth Management

For many, a down economy typically translates into a downer mentality. This volatile market can be overwhelmingly discouraging, which leads people to sit at the kitchen table with their head in their hands, saying, “Tell me when it’s over.”

The good news is it doesn’t have to be this way. A less-than-ideal economy can lend itself to a better-than-ever situation. All you have to do is plan for it.

There’s no denying the economy is in trouble or that people are seriously struggling. The market has been obliterated over the last few months, coming in at levels it was 11 years ago. The world has been turned upside down.

The market, essentially, has gone through nature’s equivalent of the “100 year flood.” Meaning, that this downturn was one of the worst in the past hundred years—-excluding the great depression. And because of that, it’s more important than ever to be alert and proactive. That deer-in-the-headlights mentality isn’t going to do you any favors.

Stocks have gone down, and they’ll go back up. We just don’t know exactly when. So it’s essential to evaluate your options and look to the future.

The market is often described as psychology in motion. It’s all based on confidence. For example, going into the election, consumer confidence was down. The politicians were telling people how bad things were, and they were scaring everyone to death.

Then we elected the new president, and consumer confidence went up 11 points—that day. President Obama didn’t do anything yet — but the perception of what he might do positively impacted the consumer confidence numbers.

The bottom line, is when confidence leaves the system, everything comes to a standstill. People stop spending because they’re scared — despite the fact that they still have a job and their paycheck hasn’t changed. The right move, however, is to do the opposite. Normally, we have to scour for the kind of deals you can find in today’s market. But now the situation is akin to someone pulling up with a dump truck full of bargains and leaving it there for the taking.

Taking advantage of the incredible bargains requires strategy and forethought. You can leave it to random luck, or you can strategically position yourself for great returns. This may be the way to make lemonade out of lemons. Now is the time to position yourself in a way that allows you to capitalize on an opportunity that rarely comes along. UB

Despite what you may think, starting your own business in a recession offers opportunities

By Joseph R. Cardamone, President, United States Federation of Small Businesses (USFSB)

Often times, the monotony of punching the clock as someone else’s employee leads to day dreams of starting a business and being your own boss. In rough economic times, those day dreams may never pass beyond imagination. “Times are tough, how could I start my own small business now?” one thinks. That’s rational thinking, but, counterintuiviely, a down economy can actually create great opportunity for budding entrepreneurs.

There are a variety of benefits to starting a small business during poor economic conditions. For starters, office rents could be lower and suppliers may cut better deals. Downturns are a great time to sign new accounts. Customers are examining every expense for ways to save, including asking eager entrepreneurs for price bids in order to replace current and expensive vendors.

An unfortunate reality of hard times is increased unemployment. But, for small business owners, this means more experienced talent is available in the marketplace, with more affordable salary requirements.

However, as you can imagine, the grass isn’t all green for entrepreneurs making a start in a down economy.  It’s tough, very tough.  A down economy means tighter lending standards, higher prices on energy and food and weak consumer spending. Like those millions of entrepreneurs who started a business during the recession of the early 1990s, today’s dreamers need to ask themselves if they have the appetite for risk and fire in the belly to succeed as a small business owner. For those inspired to give entrepreneurship a go, here are some quick tips for starting a small business in poor economic conditions:

• Avoid the middle market products and services – Even in a down economy, consumers and businesses need necessity-based products and services – office supplies, tech services, food, medical assistance, waste management, etc. Conversely, an innovative luxury item can also be successful. Avoid the middle ground; if customers can delay purchase while times are hard or choose a less expensive alternative, that’s not the industry to be in.
• Don’t fret the big bucks – If start-up capital is an issue, consider starting a part-time business. Keeping a day job for a while can help maintain a steady income while waiting for sales from the new business venture to kick in. It’s also a smart way to work out kinks, gain industry knowledge and build a solid customer base without superfluous financial stress and pressure.
• Make equipment multitask – Technology products are getting smarter and helping people streamline. Many printers can also scan and fax. Another printer, the DYMO LabelWriter printer, both prints a variety of labels, and enables users to purchase postage online through DYMO Stamps. This enables professional looking mailings, without the commitment or expense of leasing a postage meter, all while saving trips to the post office.
• Strategize staff selection - Minimize full-time staff. Hire part-time employees. Contact the local college or university to see if they offer a formal internship program. In some states, interns can work for free or class credit only. Outsource or hire freelancers who can take overflow work or specialty jobs. Don’t invest precious resources employing people who may be underutilized. As business grows, you can consider adding more full-time employees.
• Embrace the guerrilla – Don’t spend a fortune on advertising. Use guerrilla marketing techniques to get the word out. There are hundreds of free or inexpensive ways to do business promotion: Distribute free product to attract people and secure repeat customers. Write a column for the local newspaper. Get involved with your local chamber of commerce. Network with other area business professionals. Display the company logo on a vehicle.
• Buy the business – Many businesses for sale are completely viable; the current owner has simply run out of time, energy or entrepreneurial passion. Although it may cost more up front, the purchase of a business can provide an existing foundation and income stream - ready to be nurtured and advanced to a higher business level.

Anytime can be the right time to launch a venture if the opportunity is right. During periods of a challenging market, big companies suddenly don’t take any risks; they retrench and bunker down. In contrast, entrepreneurial start-ups, small and agile, are out reinventing models. Great ideas, some savvy business sense and a passion for self-employment can overcome any type of economy. Good luck!

Joseph R. Cardamone is president of the United States Federation of Small Businesses (USFSB). Founded in 1983 by small business owners, USFSB advocates for the rights and interests of small businesses and the self-employed. Their mission is to help their members grow and prosper by joining together and effectively promote small business interests before local, state and federal lawmakers.

This recording is of the welcome speech by Martin Lewis, editor-in-chief/publisher for Utah Business magazine at the Outstanding Directors Awards on October 30, 2008. Lewis talks about the outstanding directors awards and why directors are so important to businesses in the state of Utah.

By George Spilka

As this article is being written during the fourth week of September, the U.S. is in the midst of its greatest financial crisis since the Great Depression. Congress is in the process of debating a proposed bailout package of the financial industry by the Federal government. This infusion of capital would be the most massive governmental intervention in the financial markets in this country’s history. Although the bailout has not been approved yet, I believe that it will by next Monday. If, Congress doesn’t approve it or an alternative package of comparable substance, there will be a complete freezing of the credit markets. The financial consequences will be the most devastating in the past 80 years.

What brought the country to the brink? – Very simply, the reckless, verging on idiotic, residential mortgage lending that took place starting in 2004 combined with the use of modern technology to design exotic financial derivatives that almost nobody fully-understood the consequences of. The massive use and distribution of these derivative products was almost completely funded by debt.

Why did it happen? – The crisis was fostered by a culture of greed that has permeated this country since the “dot com” explosion of the 90’s. This culture reached its apex on Wall Street, where the “Wall Street Whizzes” felt that no amount of money was enough. It was nurtured and brought to maturity by the easy money policy of the Federal Reserve under former chairman, Alan Greenspan. This resulted in the most excessive and imprudent lending and use of leverage seen in U.S. history. The consequences should have been realized by all at least 3 or 4 years ago. I assure you the eventual consequences of their actions were evident to the Wall Street Whizzes. However, why should they have worried? They already would have made a vast fortune from it. Their personal wealth would be secured before the problem became evident. Others could deal with the carnage. The others turned out to be the United States and the taxpayers.

What hasn’t happened in the financial crisis – The impact has been limited to the financial industry, which has been devastated by the losses sustained in the residential mortgage lending market and the losses related to credit default swaps and other derivative products. At the peak of the financial crisis on Wednesday, September 17 as financial institutions became concerned about extending credit to anybody; thereby almost causing a meltdown of the U.S. financial structure, the Federal Reserve and Treasury stepped-in and proposed the bailout package. This brought renewed life to the credit markets. However, while this scenario evolved, U.S. industrial companies (both manufacturers and distributors) had their strongest balance sheets since the 1970’s. There has been no massive borrowing by America’s industrial companies during this period, nor has there been any meaningful disruption in the manufacturing and distribution segments of our economy. The immediate impact has been limited to the financial markets, and this is where the impact will be contained.

As I survey the landscape, although the economic figures indicate the country is in a recession or an economic downturn (define it as you like), the profits of U.S. industrial companies remain strong. The results for public companies indicate that although profitability is moderating, it remains at historically high levels. My clients are realizing moderate to strong profit growth this year.

In my opinion, the intermediate and long-term impact of the financial crisis on the economy is going to be negligible, if any. I believe that by the 2^nd half of 2009 the country will be coming out of the economic downturn. My major concern regarding future economic performance is the amount of guarantees that have been made by the Federal Reserve and Treasury. These could possibly lead to a significant worsening of the Federal deficit. If it does, it will exacerbate our dependence on foreign countries and provide further opportunities for foreign sovereign wealth groups. In this scenario, without foreign governments increasing their already large purchases of U.S. debt instruments, we will likely have a significant increase in the inflation rate and a further weakening of an already weak dollar.

Obviously, this foreign ownership of America is not only a political concern, but it also has potential long-term business consequences. However, despite the aforementioned concerns, I believe the financial crisis will have limited impact on the intermediate and long-term economy.

Owners and executives of middle market companies, such  market defined as companies with a transaction price between $5-$250 million, will now continue to get their ceaseless level of calls from brokers, intermediaries and low-grade investment bankers. However their storyline will now be, either upfront or as a deal progresses, something similar to, “you better sell at a discount price before the carnage gets worse”, or “you should be thankful to receive this price due to current financial conditions”. There is no justification for those type of statements.

Most acquirers will tell you the devastation in the financial markets means you will have to accept a substantially discounted price. You will be told that pricing will be “dirt cheap” into the foreseeable future and might even deteriorate further. Don’t pay any attention; this is hogwash.

The Impact of the Financial Crisis on the Sale of Middle Market Companies

1.   Short-term impact – (up to 1 year) - There might (or might not) be a period of 3-6 months where there is some turmoil in the acquisition market. Conceivably, there could be a degree of transaction pricing weakness through the end of the 2nd quarter of 2009, but I doubt it.

2.   Intermediate-term impact (1-3 years) – There should not be any impact on transaction pricing, unless the effect on the Federal deficit of the guarantees made by the Federal Reserve and the Treasury have a greater impact than I believe they will. At this point, I don’t anticipate that happening. Therefore, I expect deal pricing to be similar to the 1^st half of 2008, which was reasonably solid.

3.   Long-term impact (3 plus years) – None. Many things will affect pricing, none of which will be the current financial crisis.

Based on my economic outlook, I don’t feel the financial crisis should have any significant impact on potential sellers of middle market companies.

The Recommended Course of Action

Don’t change the overall strategy regarding the sale of your company. If selling satisfies your personal and business objectives, you should proceed with the process. You might delay contacting potential acquirers until after the first quarter of 2009, but that will not be necessary in most cases. Furthermore, don’t modify your expected transaction price at this time. I am not reducing the pricing for any current clients.

For companies not yet in the market or ones at the very start of the sale process, whose fundamentals and business foundation are somewhat deficient, they might want to delay the sale, while they strengthen and reposition the company. However, where there is no need to strengthen the company’s fundamentals or foundation, I see no reason why approaching acquirers should be delayed past the start of 2009.

My overriding advice is don’t be intimidated by acquirer’s “doomsday scenarios”. The financial crisis has not changed anything in the industrial sector of the U.S. economy. Most companies remain very profitable and the intermediate and long-term business outlook remains good. Therefore, there should be no transaction price concessions. If patience is necessary, it will provide you a bountiful reward.

These are times when you truly need a strong-willed, determined, knowledgeable investment banker that understands the causation of the financial crisis and how it is likely to play out. They will provide you the proper guidance in how to proceed in these exciting, but turbulent, times. If you have this strength and expertise on your team, you will get a premium price. Don’t let acquirers intimidate you!! Don’t accept less than you deserve!!!