Seven Tips for Starting a Business During a Recession

No one has to be told how grim the employment scene is these days. The fact that we are in a full-blown recession makes it pretty clear that jobs aren't falling from the sky like manna. Factor in the company closings and downsizings that have pushed jobless claims to the highest they've been in twenty-six years, and the picture becomes even grimmer. But don't despair. If you find yourself out of work, you're not doomed to a depressing and ultimately fruitless search in a decimated job market. Ed Hess suggests you take your destiny into your own hands—and start your own business.

"At first glance, it might seem that a recession is a terrible time to hang out a shingle, but that's not necessarily so," says Hess, Professor of Business Administration and Batten Executive-in-Residence at the Darden School of Business at the University of Virginia and coauthor along with Charlie Goetz of the new book So, You Want to Start a Business? 8 Steps to Take Before Making the Leap (http://www.edhltd.com/So_book.htm). "People need certain products and services regardless of what the economy looks like.

"If you can offer a product or service better, faster, or cheaper than your competition, then you can succeed in good times and in bad," he adds. "And because you're starting from the ground up, you can configure yourself to meet their needs from the get-go—rather than doing what many companies are doing and trying to fit round pegs into square holes out of a desperate need to get the business."

Of course, you've heard all the horror stories of new companies that crashed and burned—or worse yet, never got off the ground. And you can't help but think that this is even more likely in a terrible economy. But don't worry, says Hess: Start-up failures are often a reflection of the owners' inability to properly run a business than of the market for small businesses itself.

"If you've done your homework and you're truly committed, don't let the bad economy stop you," advises Hess. "If a business owner doesn't make the right decisions, he or she can fail under the best of circumstances. Conversely, if you're like many of the talented, savvy business people losing their jobs right now, you have the instincts and the skills to succeed as an entrepreneur.  So if you do the necessary planning on the front end and you avoid preventable mistakes as you get things going, a successful enterprise can grow out of your efforts."

If you have a business idea you think could work, take the following advice to heart:

First, forget the idea that you're giving up "security." (There's no such thing.) The idea of going it alone can be a scary proposition regardless of how well the economy is doing. But the same things that can happen to you can just as easily happen to some big, established company. The harsh truth is that your work life expectancy in Corporate America can be pretty uncertain these days. The National Bureau of Economic Research recently announced that since the recession began in December 2007, 2.7 million people have joined the ranks of the unemployed. As layoffs in the hard-hit banking industry continue to be announced and with the uncertain future of the U.S. auto industry, that number is sure to keep increasing.

"The benefit of being a small business owner is that in times like these you control your fate," says Hess. "You don't have to worry that you'll come in to work one day and get the ax. You don't have to live with someone else—perhaps someone less competent or hardworking than you—in charge of your future. You can make changes in your business as you see fit. There is a definite sense of comfort in knowing that you are the one making the decisions that will affect your life."

Start small without risking a lot of money. This is good advice for any worried entrepreneur, but it makes even more sense in a sluggish economy. Starting small gives you the ability to test the job market while you get your business off the ground. It also means you can "test drive" your idea without making a full financial commitment. If business starts to pick up, you can make the decision to transition into a full-scale company—or, if you find a job while you're testing the entrepreneurial waters, you can keep your new enterprise small and use it to make some extra money on the side.

"A small business doesn't have to be an entity with store or office space," says Hess. "You can do freelance website design from your home office at night, for instance, or run a landscaping business on the weekends. By starting things off out of your home, you can save the money you would otherwise spend on rent and utilities. It's always good to build up a customer base before you incur too many costs. By starting small you can learn what customers are willing to pay for without 'betting the ranch.' Remember, entrepreneurship is learning by doing. And successful entrepreneurs listen and adapt. They love their customer more than they love their product."

Find out exactly what your customers want. Before you pour a lot of money into getting your business off the ground, do your due diligence by talking to as many potential customers as possible. Customers know what they are willing to pay for. Ask them what they want out of the product or service you'll be focusing on and find out how your would-be competition is missing the market in delivering it to them. In fact, Hess suggests that you go to your competition as a potential customer so that you can see firsthand what their real customers experience.

"This allows you to design an offering for your potential customers that is different from your competition's," says Hess. "But most importantly, it will be different in the right ways. Remember, you need a differentiating, compelling customer value proposition that sets you apart from the competition. Once you've settled on it, make it easy for those first customers to buy from you, because in order to build up your customer base, you'll need customers who are willing to act as a reference for you and who are eager to spread the word about your great new business."

Seek the advice of experienced entrepreneurs. No one provides better mistake-dodging advice than small business owners who have already weathered their share of economic ups and downs. Seek out entrepreneurs in other cities or those who serve a slightly different market segment than the one you're planning to target. Ask them what obstacles they ran into when they were getting started and find out what they are doing to keep their doors open during the down economy.

"You may be thinking that entrepreneurs in the same industry might be unwilling to provide advice," says Hess. "But I think you'll find that entrepreneurs are an inclusive group. As long as you aren't going to be their direct competition, small business owners are very willing to help new entrepreneurs from another city. Develop these types of relationships in the outset, and if you need advice once you get started, you'll already have a foot in the door."

Finance your business yourself. It's true. Lenders are no longer handing out small business loans like candy. But if the inability to get a small business loan is keeping you from going out on your own, know that there are other options out there. One alternative to financing is to take a look at your savings to see what you can put toward the business without incurring too much financial risk—typically, around 20 percent of your net worth.

"The key is to start small and keep your costs low," says Hess. "Don't assume any debt at least until you have found a handful of loyal customers. You shouldn't be growing faster than your cash flow. So, keep a close eye on your budget as you are getting things off the ground. And don't give in to the temptation to reach for the plastic every time you are low on cash. You shouldn't incur any debt until your business is off the ground, and credit card debt in particular should be avoided. If you are able to stay small while providing quality products and services and great customer service while simultaneously managing costs, you will be on the path to creating a successful business."

Take advantage of the flooded market. These days you can get better things cheaper. If you are a small business owner looking for employees, you'll likely be able to hire more skilled workers for less money than they might normally accept. Maybe they desperately need the work, or maybe they just understand that slow economic times mean lower salaries (and they trust you'll make it up to them when the recession is over). When you want to expand your enterprise, you may also be able to get a good deal on an office lease or storage space. The real estate market is suffering right now, so more and more property owners are looking to make money on their properties any way they can.

"You may also be able to lure good people and vendors in at lower prices with the promise that you'll grow together," says Hess. "In other words, you can form sort of an unofficial partnership with these people—they'll work hard for you now without expecting a lot of money right away, and in return they'll get a cut of the profits they helped create in the future. This is a great way to build relationships with the people you work with both inside and outside your business. Just make sure these relationships are mutually beneficial. You don't want to create a situation in which your employees or your vendors feel like they are being taken advantage of."

Provide unbeatable customer service. One area in which a small business should always excel is customer service—good economy or bad. But when things are down and customers have less money to spend, they really care that they're getting a lot of bang for their buck. They'll also be looking to cut out those businesses that aren't meeting their needs. As a smaller company, you'll have an advantage over larger competitors because you are better positioned to provide consistent, outstanding service. Small businesses just tend to be more flexible and can "turn on a dime" to meet client needs as they arise.

Let's say you own a small hardware store and a customer is having trouble finding the right tool for a home project, and, as sometimes happens, he's having trouble explaining to you exactly what he needs. As a small business owner, you might offer to go to the customer's house and check out the project to ensure he gets the right tool. It's unlikely that an employee or manager at a big box hardware store would be able or even willing to drop everything for a house call.

"Essentially, it's easier for small businesses to go that extra mile," says Hess. "When you're a one-person, or even a two- or three-person business, you expect to work hard and be on call at odd hours of the day as opposed to employees at larger, more rigid companies who tend to follow set procedures—procedures that don't always fit with the customer's agenda."

"The economy is getting a lot of blame these days for sinking businesses," says Hess. "I'm not saying it's not making things harder for some companies—it certainly is—but it isn't a deal breaker by any means. Sometimes it's just a convenient scapegoat. When it's based on a good business opportunity and backed by commitment and plenty of old-fashioned hard work, a small business can do quite well during tough times.

"In fact, people who launch start-ups tend to be more passionate about their work than those who just go in for a paycheck," he adds. "And passion goes a long, long way toward success. So, if you want to start a business—even in today's bad economy—take the necessary steps to ensure it's a viable opportunity, and get to work."