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Taking Advantage of Recessions

Recession! Scary - and not just Halloween scary. There’s nothing like a recession in the broader economy or your specific market to derail an otherwise excellent investment. That’s why the best private equity professionals dedicate time and energy to tracking the economy and their investments’ submarkets. And they should, though we see that as table stakes.

We think recessions create as much - or more - opportunity than risk. With a notable caveat: you must prepare before one arrives. If you are proactive, market downturns won’t take you by surprise. Instead, you’ve enabled your organization to take advantage of a recession by ensuring your organization can withstand a recession. IF you aren’t focused on survival, you can direct your efforts towards capitalizing on the opportunities downturns always present.

So how do you take advantage of a recession?

In short, proactively preparing for one. We see effective recession strategies having three parts:

  1. Ensuring a strong foundation

  2. Watching your indicators

  3. Executing your gameplan

Ensuring a strong foundation.

Without a good foundation, you’ll struggle to capitalize on a recession. Really, without a good foundation, you’ll struggle to survive a recession. Your foundation is made up of two main parts: your balance sheet and your available equity. You’ll need to take a close look at your balance sheet before making any grand strategic plans; if you aren’t turning a profit before a recession starts, then you probably won’t suddenly become profitable six months into a downturn. If your balance sheet isn’t as strong as it needs to be, solving that particular problem should be your first priority.

But, a strong balance sheet is only half the foundation. Recessions have a bad habit of negatively impacting your cash flow. Do you have sufficient equity to function, even during a market downturn? How about your lending relationships? You’ll need well-established, long-term lending relationships in place to ensure that your company has enough equity to operate in a challenging environment. Best to pay attention to your equity before you’re in a crisis.

Your foundation will protect your organization from the cash-flow issues that become fatal during market downturns. Now, you can develop your recession plan. How will you invest during a recession? How can you improve your P&L and conserve (or generate) cash? How will you play offense? Again, we can’t overemphasize how important it is to plan before you see warning signs. If you delay, you’ll end up wasting valuable time - and missing out on opportunities as a result.

Identify warning signs.

Recessions impact every market differently. Before you can start to develop a strategy to survive a recession, you need to understand how market downturns impact your specific market. After all, it’s hard to defend your organization well if you don’t know exactly what you’re defending against. Identify the performance indicators that will tell you with a high degree of certainty that you’re not dealing with a bad week or month; you’re in the early days of a recession.

Once you’ve identified these performance indicators, you can monitor them. For example, in healthcare, we generally look at changes in revenue/volume from quarter to quarter and year to year. If those numbers go down below a certain point, we know it’s time to execute our recession strategy.

Go on offense.

Recessions aren’t all bad news. In fact, they present significant opportunities for organizations in strong positions. Which is why we stress the importance of good preparation and watching for early signs. Assuming you recognized the recession early and maintained your strong foundation, your organization is uniquely situated to take advantage of opportunities by way of your offensive strategy.

To be blunt, your weaker competitors are going to struggle more, leading to very attractive value-creating opportunities. Mergers and acquisitions will be easier to finalize and will come at better prices. As competitors fold, you will be able to attract their clients to your organization. However, don’t make the mistake of focusing entirely on capitalizing on the shifting competitive landscape. Your organization will need to adapt as well, and your offensive strategy should reflect this reality. Your customers will be feeling the effects of the recession, and their needs will shift as a result. Your value proposition may need to change to resonate with your clients’ evolving priorities.

Developing and fine-tuning your company’s recession strategy before you’re in a recession is vitally important. Engaging experts who led organizations successfully through past market downturns is one of the best ways to ensure you don’t face any unpleasant surprises. If you’d like to discuss your recession strategy with an experienced industry expert, Bancroft Group can help. We will tap our Operating Executive Network and other resources to help you assess your recession strategy and refine it based on our extensive real-world experience.

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