When a meteorologist says it’s likely going to rain, we instinctively grab an umbrella and raincoat, knowing it’s best to be prepared. Similarly, when an economist says we are heading for a recession, it’s prudent to grab a proverbial raincoat. Below are seven steps to prepare businesses for a period of economic uncertainty.
According to a recent article in the Financial Times, nearly 70 percent of leading economists predict that the U.S. will soon enter a recession and inflation will reach its largest annual increase in 40 years. So now is the time for middle-market private equity firms to enact downturn readiness and response plans and provide direct support to their partner businesses to weather a recession.
The middle market doesn’t have the luxury of debating whether a recession will happen. We have the responsibility to prepare partner businesses while simultaneously capitalizing on changing market conditions. Control middle-market private equity is in a unique position to help partner businesses prepare for economic uncertainty because of the close and direct working relationships they have with founders and senior leaders.
As the founder of Baltimore-based middle-market private equity firm Access Holdings, I and my partners are control investors committed to building enduring businesses in essential services sectors. In the aftermath of Covid-19, supply chain disruptions, rising inflation, and other crises, middle-market control investors like Access Holdings must have a framework to approach each new challenge with a basic repeatable formula – assess the situation, plan, act, evaluate and revise the plan.
Access Holdings launched its downturn readiness and response process with our portfolio company executives, board directors, advisors, and partners back in April. Heading into a downturn, it’s critical to maintain a systematic and disciplined approach to keep everyone aligned and anchored on direction and priorities. Here are seven key steps we are deploying to prepare our businesses for a period of economic uncertainty:
- Maximize liquidity to protect your business while maintaining flexibility to respond. Consistently monitor working capital and re-evaluate plans for capital investment.
- Re-visit pricing to find opportunities to pass-through costs, introduce tiered pricing to retain customers looking to trade-down, and deploy technology to dynamically adjust prices as market conditions evolve.
- Increase communication to ensure alignment and responsiveness across your organization. Establish frequent meetings with leadership to discuss market conditions, actions taken, and objectives/results.
- Re-visit critical initiatives, such as customer programs or M&A and triage what is most important for the organization’s long-term growth and success.
- Look for opportunities to innovate and evolve your offerings as customers adapt to the changing market environment. Consider bundling or rationalizing offerings or launching new offerings depending on shifting customer preferences.
- Reduce supply chain risk by re-structuring vendor agreements, creating new vendor relationships, enhancing procurement processes and governance, and evaluating alternative solutions.
- Automate data collection and analysis using digital tools to quickly gather operating data and external information to enhance decision making and identify opportunities to streamline operations and improve efficiency.
Hockey Hall of Famer Wayne Gretzky famously said, “I skate to where the puck is going, not where it’s been.” Anticipate and plan for future business challenges now. Doing so will protect partner businesses and their workers from the consequences of a recession and create opportunities for long-term growth once the economy emerges on the other side.