Is a Recession the Perfect Time to Start a Business?

Received an email today pitching services for a “renowned business expert” who would like to be interviewed. The pitch was that a recession is the perfect time to start a business because:

* First, everything costs less!

“Start up costs are much lower than 3 years ago,” explains business startup expert, Danielle Babb. “Things like retaining a website designer, investing in commercial space, buying office equipment are all at least 30% cheaper now than they were during the boom.”

* You can hire top talent because of the high unemployment rates.

“Not only are there highly qualified workers available, but most of them are willing to work for less than they did 3 years ago! You can hire more people or you can bring them on as independent contractors.”

* Many suppliers are giving credit.

“Suppliers are now offering a credit option because they need to make the sale. There are lots of low or no money down deals,” outlines Dani.

* You can buy costly equipment at auction for a fraction of the price!

This got me wondering how true these accepted truths really are… let’s take a look.

Everything costs less!

True, many expenses like commercial real estate and some services are discounted but the flip side is that your own pricing will also be discounted while hardware and datacenter costs are not likely to be discounted much at all. Headcount, the single largest expense any business has, is a little more complex. Payroll taxes haven’t changed materially and benefit costs continue to go up, in spite of salaries being flat or even reduced 5-10% in some cases.

Verdict: some things cost less but in light of the more complex picture on business expenses it is certain that margins will be compressed meaning less free cash flow for business investment.

You can hire top talent because of high unemployment rates

Technically true but the best people in any industry are always in demand so to suggest you can have your pick of the bunch is just as untrue today as in years past. You will always be competing for top talent and if anything the best people tend to gravitate back to the security of large companies in times of economic turmoil because of natural risk aversion. Lastly, top talent is always in a position to demand and get top pay, further eroding the “everything costs less” meme.

Verdict: complete bullshit.

Many suppliers are giving credit

This assertion flies in the face of everything we know about the financial market crisis and broader industry news. Suppliers are demanding letters of credit more now than ever before while large customer are telling suppliers that they won’t issue letters of credit because of finance costs meaning the burden for credit is more than ever being pushed on suppliers. It’s a real conflict but one thing is certain, if you go to a supplier for credit to your startup, be prepared to put some personal collateral on the line or agree to some onerous terms… which also reinforces the above claim that not all business expenses are going down.

Verdict: I haven’t seen any truth to this.

You can buy costly equipment at auction for a fraction of the cost

If you need costly equipment auctions are a viable avenue but keep in mind that warranty and support will be extra.

Verdict: As in past economic downturns this is absolutely true.

I don’t think there is a bad time to start a business because the one truth about new venture creation still holds true, you build your business plan to reflect current and projected economic conditions. Starting a business today means you do it with less capital, have a clear line of sight to revenue and profit, and do your best to cover all known risk factors with more specificity than in years past. Capital is tougher to get but still available, and customers will no doubt be more demanding but none of this means it’s a bad time to start a business.

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