Economic “good times” come and go. That’s why it’s called the “business cycle”: While we can’t predict exactly when it will come, how long it will last, or how severe it will be, we do know for sure that an economic downturn is coming.
Seasoned business leaders know that it’s never too early to prepare for the next lean period. Whether it arrives in six months or six years, those who’ve anticipated it and planned accordingly tend to come out better than those who think they can wing it.
“When economic uncertainty increases, business leaders need to be vigilant and take proactive measures to protect their interests,” says Yaron Valler, founder and CIO of Target Global, a venture capital firm with offices in Europe and the Middle East.
Valler and his firm advise entrepreneurs and other business leaders to take the following steps to prepare their enterprises for an eventual downturn while remaining nimble enough to seize opportunities in the meantime.
Reduce Non-essential Expenses
Resilient businesses are quick to reduce non-essential expenses when they face difficulties. It’s best to do this while times still seem good, so that you don’t feel like you’re playing catch-up with more nimble competitors as the economy softens.
Most companies can find 3% to 5% of gross expense to cut without resorting to forced layoffs. Often, this can be accomplished by renegotiating contracts or switching to cheaper vendors with minimal impact on business operations.
Freeze Non-essential Hiring
Another important proactive move is to freeze non-essential hiring across the organization. Even a single avoided $100,000 annual compensation package can make a difference on the margins. Before announcing your hiring freeze, make sure you’ve officially classified roles as essential or non-essential (and any gradients within those definitions).
Assess the Underlying Health of Your Business and Consider Strategic Alternatives
It’s also wise to proactively assess the underlying health of your company’s component parts. This is important even if your enterprise is “simple” or in its early stages of development.
The next step after that is to consider whether any components of the business should be wound down or sold off. This is popularly known as “exploring strategic alternatives,” and it’s a normal part of running a company.
However, experts warn it can also be a sensitive endeavor that must be done thoughtfully, and perhaps — at first — discreetly.
“The decision to publicly announce the exploration of strategic alternatives marks a significant corporate event,” says corporate governance expert Jenny Zha Giedt.
“Increased transparency can lead to a better M&A outcome yet also lead to the withdrawal of stakeholder support and the disruption of business as usual,” Giedt says.
Bring Fresh Talent Onboard
If you worry that your business is weak or vulnerable heading into a possible downturn, don’t wait to shake up the org chart. Consider making an exception to your self-imposed hiring freeze to bring on subject matter experts capable of offering fresh (and frank) perspective, or even a turnaround specialist to help your teams get back on track.
Reduce Headcount (Voluntarily at First)
Even as you let fresh perspective into your organization, you may find it necessary to part ways with other team members.
If possible, try to accomplish this through voluntary means, both to reduce the impact on individual team members and to avoid raising questions about your company’s health.
For example, when a team member leaves voluntarily, leave the position vacant unless it’s deemed essential. If that’s not sufficient, consider a round of voluntary buyouts with generous severance. A base of one month’s pay plus one week for each year of service to the company is customary.
The analysts at the Corporate Finance Institute note that employee buyout acceptance rates tend to be relatively high because employees know the offers come at a delicate time for the company.
“If the employee does not accept the severance package, their job is still at risk…because employee buyouts are generally offered when a company is approaching a layoff,” they say, adding that buyouts tend to be seen as more “ethical” than forced layoffs while achieving similar results.
Hope for the Best…
“Hope for the best, plan for the worst.” If there’s one piece of advice you follow without reservation, let it be this.
We can all hope for the best outcome (realistically) possible while admitting that things probably won’t work out so well and taking some comfort in the understanding that the worst-case scenario most likely won’t come to pass either.
All the while, we prepare. And we wait, come what may.
