When you see daily headlines about a pending recession, it’s easy to get into the mindset that you should act on this “special” information.
But just because something is in the news doesn’t mean it should affect your decisions.
Many candidates have asked me if they should hold off starting a franchise until after a recession passes. If you have already planned for downturns, then historical analyses of recessions show that it’s likely in your best interests to continue investing.
In this article, I’ll break down 11 reasons you should probably start your business regardless of the short-term economic outlook.
1. Long-term decisions should be made on long-term factors.
The success of your business this year, next year, and each year that follows is primarily dependent on long-term factors:
- Your business model
- Your expertise
- Market demand
- Capital available
Market demand may sink during a recession, or it might go up. Any loss in demand isn’t ideal, but there are tradeoffs.
A recession usually gives you lower startup costs, more capital available, less competition, and more affordable high-quality workers.
The business success factors we discussed are long-term factors. If you hire wonderful software developers and train a great staff, that asset will serve you well long after a recession ends. If you choose a good business model in an appropriate location, you can make some money during a market contraction, and you’ll be positioned to make even more money when the market expands again.
2. Most franchises already protect you from short-term sales drops.
Market fluctuations are a permanent feature of any economy. While large businesses can easily absorb bumpy numbers, fluctuations have stronger impacts on small businesses. Since franchisors have a vested interest in the success of every franchise they work with, franchisors take multiple steps to ensure franchisees will be successful.
First, franchisors almost always impose a requirement that franchisees have a minimum amount of capital reserves in the bank to ensure franchisees can successfully weather difficult months.
Second, franchisors usually do some research to ensure a location you propose will be successful before you invest.
Finally, some of the core benefits of franchises – recognizable branding, automated national advertising campaigns, efficient standard operating procedures – all work to protect a franchise economically. These are important security benefits that independent businesses rarely enjoy.
3. We may not see a recession.
Mark Zandi, the chief economist at Moody’s Analytics, acknowledges the fragility of the economy. However, he does not forecast a recession. In late June 2022 he said, “The economy is slowing and it will be uncomfortable over the next 12 to 24 months, but I think we will make our way through it without a recession.”
Betsey Stevenson, economics professor from the University of Michigan and a former chief economist at the U.S. Department of Labor, says that Fed has multiple tools to avert a recession or to at least minimize a recession’s impact. She says that the Fed’s rate increases are not likely to “wallop” either businesses or households. She defended this by pointing out that interest rates are still lower than in 2018 and 2019 and that the interest rate hikes are coming at a time when businesses and households have substantial savings available and the economy has low unemployment.
Speaking of unemployment, the unemployment rate is historically the most reliable forward looking indicator for predicting recessions. Currently (as of July 2022) unemployment is at near all-time lows at just 3.6%. That’s down from 5.4% in July 2021 and 10.2% in July 2020.
None of this is to say that a recession is unlikely. It’s just worth noting that there is still no consensus on whether a recession is even going to happen. And there is also evidence to suggest that if a recession occurs, it may be very mild.
This brings me to my next point….
4. A recession doesn’t mean a “crash”.
A recession means that the gross domestic product (GDP) of an economy shrinks for two quarters in a row.
The fact is, the average recession lasts 6-12 months. Even the Great Recession lasted only 18 months. Recessions occur regularly, and they amount to blips in the longer narrative of your business career.
There are at least 4 reasons to believe this recession will not be a “crash”.
- Right now, businesses and households have strong balance sheets. People generally have more cash than before the pandemic.
- People have plenty of economic opportunities to maintain the lifestyle they enjoy today. Jobless claims are at 50 year lows. Businesses are hiring across a range of sectors. A Homebase survey of 400 small businesses showed that 92% plan to hire in the next year. In short, a job shortage is unlikely to deter most customers from spending money at your new business.
- While most economists project housing prices to increase at a slower rate, you’d be hard pressed to find an economist who predicts a housing “crash”. Today, there are far more people looking to buy homes than people looking to sell. The lack of housing inventory in the US is extremely effective at maintaining high real estate values.
- Consumer spending is incredibly robust. In fact, people are spending more money today than economists predicted before COVID. If you hear about “drops” in consumer spending, keep in mind just how high current spending levels actually are.
5. It’s a huge mistake to let fear of a crash prevent you from investing.
Planning for a dire crash is a great example of letting your emotions take charge of your investing decisions.
People associate recessions with rising unemployment, stock declines, and lower wages. These are all potential outcomes you can protect against by:
- maintaining an emergency fund
- holding onto a secure job
- spending within your means
- setting aside 10%+ of your income for investing
- diversifying your income with a side business or other revenue streams
If starting a business means dipping into your emergency fund, then by all means, hold up. Wait until you have enough money to launch without cutting into your safety net.
If starting a business means leaving a great job that pays your bills, I would advise you to start a business that won’t force you to abandon a stable income source. Franchising is ideal for this. I can show you how you can start a franchise business as a passive owner, hire a manager to run your franchise, and diversify your income without taking time away from your job or lifestyle.
“Stay invested, stay disciplined.”
She explains, “History shows that what people — or even experts — think about the market is usually wrong. The best way to meet your long-term goals is to just stay invested and stick to your allocation.”
Most businesses are following her advice. Even now, with nearly 70% of macroeconomists forecasting a recession in 2022 and 2023, the majority of businesses in the US have decided to carry on, and they’re continuing to earn solid profits.
6. Economists can’t predict how people will react to a recession.
The International Monetary Fund studied 153 recessions between 1992 and 2014 in 63 countries.
The study found that while macroeconomists are generally good at identifying when a year will be different from other years, they usually have a hard time identifying how different a year will be.
The market panic in March 2020 is a good example. For a moment, some economists (correctly) saw doom. They quickly changed their opinion once the US government responded to these projections and provided significant stimulus to help businesses and consumers.
Economists can sometimes accurately predict a recession, but they rarely can predict how governments or people will react to a recession. These variables make a huge difference in the magnitude and length of the recession we experience. As you remember, the epic 2020 recession only lasted 2 months!
7. You can still earn a profit during a recession.
When economists break down the drivers of a possible 2022 or 2023 recession, they cite the invasion of Ukraine, supply chain shortages, inflation, and interest rate increases. These are all factors that bring down GDP, which is what technically defines a recession.
But a drop in GDP doesn’t necessarily mean a loss in consumer spending or corporate profits.
So far, people aren’t responding to these issues by drawing down their spending. Instead, many people now just want to buy a new electric car!
Despite inflation, despite headlines, businesses too are continuing to hire and increase production.
… And it’s working out well for them. In 2021, corporate after-tax profits increased 37%. In the 73 years since the Fed started tracking profits, that’s the biggest annual increase ever.
Even today, analysts predict that corporate profits will continue growing in 2022, 2023, and 2024.
2021 saw record consumer spending and record profits. So if people slow their spending… that’s alright. We may still see higher consumer spending than pre-2019. (You probably remember seeing reasonably good profits in those years.)
Bottom line: even if consumer spending drops, you can still have plenty of customers to earn a healthy profit. Recession or no recession.
8. You’ll benefit from starting your business during a recession.
A recession is a challenge. But so what?
You don’t need to back away from a challenge. You can also face it!
Facing business challenges is exactly what franchises help their franchisees do. You can expect a quality franchisor to provide you with:
- new marketing messages or tactics optimized for the latest trends in consumer behavior
- support in cross-training employees, that way fewer employees can handle more parts of your business
- new revenue streams so your business can serve new customer needs
- potential cost efficiencies like better prices from suppliers
There are considerable benefits to starting a business in a recession. You can often find more readily available talent, and in some cases you’ll also see higher customer demand. In fact, many of the world’s most famous corporations were started during a recession in part because of the unique opportunities a recession provides.
So, not only will you get support from a proven franchise to help you navigate any challenges you face, you may end up finding it easier to operate in a recession than in a market expansion.
9. Inflation can boost your profits.
Is inflation actually bad news? It really depends on what you’re doing with your money.
The Federal Reserve Bank of New York studied how corporate profits fare with inflation. The bank found that profit margins and gross profit increased in industries with more inflation.
From the gloom of many articles, you might never guess that your profits can go up thanks to inflation.
But they can! The cycle goes like this:
- A company faces higher costs for wages and supplies.
- The company responds by raising their prices.
- To pad their profits, the company raises their prices more than enough to compensate for their cost increases, thereby increasing their profit margin.
- Aware of market fluctuations, customers continue buying the same products they would otherwise.
- Emboldened, the company’s competitors also increase their prices.
While this pattern has driven inflation, it’s also driven increases in corporate profits.
10. Common investments face strong headwinds.
If you leave your money in a bank, you’ll lose about 9% a year to inflation.
Aside from an emergency fund, I think we can all agree, investing today is essential to protect and grow your wealth.
However, high inflation makes it difficult to earn a profit, let alone break even, with traditional stores of value including cash, bonds, stocks and real estate.
So long as you have a small cash cushion, and you don’t have any urgent needs for cash, historical analysis shows that it’s better to be invested.
You might choose to invest in bonds, stocks, a franchise, or some other kind of opportunity. But in the long term, the investor always beats the person holding cash.
If you put your money into a Treasury bond, you can now earn an incredible 9.6%. But that’s still just enough to maintain your purchasing power against inflation…. provided the consumer price index index (CPI) actually tells the whole story of inflation.
Many economists believe real inflation is much higher than the CPI suggests. The CPI doesn’t take into account multiple ways that we experience inflation including smaller product sizes, higher expected tip percentages, fewer store discounts, eliminated loyalty programs, and substitutions we make as we switch to lower cost goods.
If “real inflation” is actually higher than the CPI, then you might still be losing buying power with that 9.6% bond, albeit at a slower pace than with cash sitting in a bank.
Stocks and Cryptocurrency
In the long run, a stock price will increase as the value of the business increases. But in the short term, a stock is based on investor sentiment, which is amplified by retail traders more than in the past. This leaves stocks increasingly vulnerable to market pumps and market crashes.
There are some fantastic deals on stocks today. But current market sentiment is not positive, and so, as of July 2022, stock prices are still searching for a bottom. You can invest in stocks so long as you’re prepared to lose 30%+ of your investment (or 100% in some cases). But for many investors I know, a high probability of negative returns just isn’t something they’re interested in.
Along with the stock market, cryptocurrencies are falling as well. While initially excited by cryptocurrency videos, many crypto investors have lost 80% of their money in the last year. On top of that, exchanges are going bankrupt and taking millions of customers’ coins with them.
Today, many high quality real estate stocks are declining.
If you choose to buy and manage property, you’re likely to face high prices and high interest rates.
On the bright side, you might be able to charge premium rents for the foreseeable future to recoup your investment. With many people priced out of the housing market, you can potentially make good returns by renting houses or commercial real estate.
Be aware that rising interest rates are expected to cool off demand, which may lower home values and slow market growth. For this reason, it’s especially important for real estate investors to have adequate reserves to cover vacancies, property maintenance, and repairs.
11. Recession or no recession, owning your own business is still a winning investment.
As a business owner, you make money in two ways:
- the cash flow your business provides you every month
- the overall value of your company to a buyer, should you choose to exit
While the value of your company is vulnerable to market fluctuations, the cash flow your business provides doesn’t depend on investor sentiment. It just depends on what your customers buy, how frequently they return, and whether they choose you over your competitors.
If your business is just moderately successful, your business will generate monthly income. All the while, your investment should hold its value over time. This, to my mind, is the definition of a good investment – monthly income, and an asset increasing in value.
You can start a business from scratch and operate it independently. Or you can start a franchise where you follow a proven blueprint and operate with the guidance and support of a reliable franchisor.
A franchise can mitigate the risks of starting a business and make the whole process easier and faster. In addition, a franchise can give you more accurate estimates of the internal rate of return you can expect before you invest.
Regardless of whether you choose to start your own brand or take advantage of an established franchise’s brand equity, I believe that for a capable executive, starting your own business is likely to provide you with a greater return on your cash than any of the other investments we discussed.
So, what’s a good investment today? What won’t destroy the value of your hard earned money?
If you’ve been successful in the corporate world, then I think you should consider any opportunity where you can combine your capital, your business acumen, and a proven strategy.
That’s what led me to franchising, and it’s been an amazing ride since I started.
I’ve weathered multiple recessions, and I can honestly say that I’m better off for these experiences. Had I not taken advantage of the opportunities in front of me, I would not be where I am today.
Every person I work with has different needs and preferences. I would love to help you explore a franchise that works for you.
Book a free strategy session today. During our time together, I’ll show you the franchises that are doing well right now, and I’ll help you find opportunities that serve your goals and your lifestyle.