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Recession-Proof Businesses

March 12, 2012

In many of the ads you will read for franchises or mature businesses for sale, you will frequently see the advertiser boast that the offering is “Recession-Proof”.  Frankly, the vast, vast majority of that is known as “puffery”.  Puffery is actually a legal term that describes exaggerated benefits or positive features that cannot really be proven.

Some people believe that some Restaurants are Recession-Proof, particularly less expensive, fast food operations.  They believe that, despite any Recession, “ya gotta eat!”  And that is essentially true.  But speaking to a Burger King Franchisee recently, we learned that they are struggling somewhat as well, and some of the reason for that is due to the competition from other, slightly more upscale Restaurants, in their efforts to maintain themselves in tough economic times.

This is because Restaurants such as Appleby’s (and a host of others,) are making tremendous deals on discounted, full meals, that suddenly come close to what it costs the consumer to purchase a full meal at a fast food Restaurant. So, the places where you eat with your fingers are suddenly competitively priced to places where you can eat with – what do you call them? – forks and knives! After tips and such, the full service Restaurant is more expensive than Burger King. But people do not necessarily think all the way through such decisions when they are hungry and there is an Appleby’s right in front of them! And when you have the opportunity to be seated comfortably and eat something other than a burger and fries, the added expense can be much more easily rationalized.

And Restaurants are just like any other retail operation, in one essential way:  They bring you in based on a bargain, and then “up-sell” you with other items that increase the ultimate amount you sell, regardless of your initial intention.  So, fast food does not guarantee that the Recession is not a factor.

Some Auto Repair franchises will tell you that they are Recession-Proof.  Not really!  Yes, some people will delay making purchases of new cars, because of the economy.  But we have just seen that the deals with extremely low or creative financing, in particular have allowed GM and Ford to come out of the Recession, very well – so far.  On the other hand, many Auto Repair businesses are note faring so well.  The key may be in the financing that the  Auto Dealers can make it attractive.  But if you are trying to hold off buying new, and holding onto that old car, you have to pay cash for that repair.  Yes, you can use a credit card; but payment terms and reduced amounts of credit will lower your ability to do too much of that – the out of pocket payment to Repair Shops frequently do not compare as well with terms from Detroit, at least on the short term.  And as we have seen with Restaurants, short term thinking is sometimes more powerful than long term, more rational thought.

Liquor Stores are one of those things that are claimed to be “Recession-Proof”. People frequently point to Liquor Stores and say, “Even when people are broke, they still drink. Maybe more so!”

True. But some of the Liquor Store Owners we know have certainly experienced a downturn in business, as a result of the 2007+ Recession. One Owner told us, “I sell as many bottles of Scotch now, as I did before the Recession started. But now, instead of selling Johnny Walker Black at $57 for a 1.75L bottle, people are buying Inver House Glen at $13 for the same sized bottle.” He is selling the same number of bottles and even has the same Gross Profit Margin on a percentage bases; but a Gross Profit Margin of 27% on a $13 bottle, results in a far lower Dollar amount than when it was 27% of a $57 bottle!

Almost any business is going to be affected by a Recession, and the kinds of effects that are felt depend on the operating characteristics, or demand characteristics of the business.

For example, if people are out of work, or threatened with the loss of their jobs, they are going to delay or give up on making larger purchases, such as houses, cars, television sets and so on.  This is why the Automakers and Television manufacturers had to radically discount their pricing and offer extremely liberal terms, to get their goods sold.

What this means is that, in the majority of businesses, there is probably a way to survive, if you can be careful and wise with your own ability to alter your marketing and operational strategies.  (It helps if you are an Automaker or a Bank and have the Federal Government to bail you out…)

One way is to put money together in the good years that will help you re-tool your business and withstand losses that will normally occur, during the tough months or years.  This is one of the reasons we feel it is incredibly foolish to get involved with purchasing or starting a business with no money down.  Recessions are a normal part of a wide variety of economic cycles; although they come on irregular schedules, the fact that they will routinely and eventually occur should not come as a surprise.  As a business person, you MUST plan and be prepared.

Constantly re-evaluating your supply lines and Cost of Goods, is always a good idea.  Being able to understand how to cut those costs is paramount.  Methods of operation also need to be reviewed, on an ongoing basis.  Typically, when cutting Operational Expenses, many companies lay off their Sales Personnel, because they are some of the most expensive people to maintain.  However, we know of several companies that cut internal staff, telling the Sales People that they then needed to not only chase sales opportunities, but when they got an order, the Sales Rep then needed to come inside and fulfill the need.

To cut the Sales Reps meant that those companies that laid off such people had no ability to go after the small amount of sales opportunities that still remained, in the market.  Those that kept their Sales Reps incurred higher costs, but could still promote their products and services, and were far better poised to rebound more quickly and profitably, as the recovery took hold.

The key here is not to just listen to people about whether a business is Recession Proof.  Those people have their own agendas, which are normally not in keeping with your best interests.  If a Seller, if a Franchisor, if a Broker is selling you something, he/she has personal and professional reasons to push you to buy.  YOU need to be your own best counsel, in researching a given industry’s behavior during various recessionary periods.  This is – once again – the power of writing a Business Plan!

There is no question but that you cannot plan for any and every issue that may arise.  The most recent Recession virtually destroyed the credit system, as we knew it.  Some Banks, in a panic, called notes on commercial loans that had been performing flawlessly.  The Bank simply decided it no longer wanted that kind of loan in its portfolio, and told the Customer to find another lender!  How do you plan for that?!?!?

You cannot foresee that kind of circumstance.  But you can “hedge your bets” by looking for other, more common difficulties, and planning accordingly.

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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