July 2025
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Watch previous episodes here:
Ep. 148 Not All Alternatives Are Created Equal
Ep. 147 Smart Moves to Prepare for a Recession
Joe, I'm excited to talk to you today because recently we had Sophie on the podcast and we talked about how individuals can prepare for recessions.
You and Mike Rudow work a lot with business owners through our Strategist offering, your estate planning designation. And it got us thinking about wanting to do an episode and have a conversation around how businesses can best prepare themselves for a potential recession. Now, recessions aren't always bad, especially for businesses that are prepared. It could be an opportunity for them.
Yeah, absolutely. So we're excited to be here. And yeah, we're going to approach it a little bit differently than, just sort of the individual, portfolio management. But I think it really comes down to we talked about this sort of, you know, Morton we we talk about the, the right mindset plus the right strategies, a better outcome, I think for owners, going into it with the right mindset is really the first thing to do.
If we're talking about preparing for a recession, right? So one is, I think, just reminding ourselves that a recession on average lasts maybe, you know, 15 months is at least sort of in the historic out at the historical average now.
And for my conversation with Sophie, they typically happen every six years. But we haven't had it so...
So yeah, that's a good point. They're a normal part of how the economic cycle works. It actually purges less competitive businesses theoretically, from the system. And so I think one is for the owner having that mindset of like, what can I control? What can't I control, and focusing obviously on what we can control. But then beyond that, looking at it maybe as an opportunity, right, to capture more market share to capture, additional human talent like recruitment has been one of the hard things I consistently hear from business owners on attracting and retaining talent.
So and actually, a downturn might free up some of those resources.
Right. And I know here at Morton, as business owners, you and I are both business owners here. We think a lot about this and being resilient through tough times, making sure that you've got reserve capital, good margins, because I think we read a stat that 70% of mass layoffs happen during a recession. Yeah. And if your company is in a position to acquire that key talent, boy, it could really help you in the long run.
Exactly. And so I think that you use the word long run. I think I want to use that to pivot to, you know, one of the things an owner can do and owners can do is actually go back and revisit their, their vision for the company. The reason for being, I think it was Nietzsche. You said, he who has a strong y can endure almost any.
And so the idea being, you really understand, you know, why you're in the business you're in, why you're passionate about doing will help that resilience and that mindset during that difficult time, sort of get through and figure out how to weather the weather, the storm.
You know, it's funny that you bring up that Nietzsche quote, I came out, I, I came across a mark Twain quote the other day, I'm probably going to mess this up because I'm going a little off the cuff, but it was the two most important days in your life, or the day that you're born, and the day that you find out.
Why, right?
And it kind of goes back to that. Why your vivid vision? I know the strategist offering that you and Mike oversee and that we offer to clients and business owners, it really focuses around like four key areas that we help, business owners with, which is maximizing transferable enterprise value deal structure, business continuity, and then lifestyle and legacy.
So like let's talk about maximizing transferable enterprise value. Obviously, if you're a business that is going through a recession and you're not recession-proof, how do you maximize enterprise value during a time like that?
Well, I think some of these are the questions I think owners should really should be asking themselves ahead of time, but really comes down to, in many ways, owner dependance. Right, I think is really where I would start. And so, obviously a business that you're looking to increase the enterprise value of the, of the company, it really grows from moving it from what I would call a lifestyle business that focused solely on the owner to one that allows the owner to really operate more strategically level.
They're empowering their management team. They're empowering the rest of the team to take on roles, responsibilities. So it's not all decisions are being run through. The owner. So by creating that infrastructure, creating that depth of management, by creating that sort of systematic knowledge and culture that is going to make a business more resilient and obviously increase the likelihood that they're going to be able to weather a down storm during a difficult time, like, like a recession and always go back and almost go back to Jeff's quote, which is building a bigger boat.
Right. And so I think, again, if an owner can have that mindset, it's hard to do it actually in the midst of recession. But if they're building it sort of ahead of time, their likelihood of weathering a recession is going to be much greater.
And what you find is that a lot of the small businesses that are here in the US, they are very much owner dependent.
Yeah. Yeah, absolutely. You know, I'll share an example. Actually, I was with an owner this morning and we were helping bring systems in place. And actually one of the key things they need to do, they actually want to exit in the next 12 months is increase their processes and make it more visible to the next layer of management.
And so we're bringing in some key vendors and relationships to help them, on that. Yeah, exactly. That's exactly what they need to do to increase enterprise value that's ultimately transferable to a third party buyer.
So when you think about deal structure, like when you're talking with your business owners, and let's say in this example, somebody is looking for an exit in the next 12 months, 12 months doesn't seem like a very long time in certain instances, seems like a long time and or an eternity in others. Maybe if you're waiting for that check, what are some things that owners can do from a deal structure that can help protect themselves?
If you were to go into a recession during that period?
Well, I think one is making sure you've got the right team of advisors to and this is certainly an area we partner on. So making sure your your M&A advisor, investment banker, your business broker is on board with understanding your business, in the industry and what the trends are and how to structure the deal in a way that allows for if there's a downturn in the economy that hits your earnings, that allows for the deal to go through, and also your corporate accounts are going to need to be really important in that.
But I'll give you an example of something that comes to mind, which is oftentimes there's metrics where an owner has to have an earnout and they have to hit certain revenue numbers, certain, retention of clients, certain earnings numbers. And they think that predicates then the payout that the, that the owner ultimately gets, on the back end for that piece of the deal.
And so this ties into actually your personal financial planning, which is one of the fourth points as well. But I think it's really coming down to maybe giving yourself some additional wiggle room in that negotiation to allow for, again, if the numbers don't come quite in exactly where you need them to be, that the deal still goes through and that you still look like an attractive, asset to the acquirer.
So there can be some flexibility.
Exactly. Built in flexibility ahead of time so that you're being proactive. To the possibility of a downturn.
Okay. One of the other things that comes to mind is business continuity. Yeah. Right. I mean, obviously, business continuity means a number of different things. Some things you can't control, some things that you cannot, especially as it relates to a recession, you might not be able to control your end user from purchasing your stuff if they're going through a hard time.
But when you think about business continuity and how owners can help protect themselves during a recession, what are some questions that they should ask themselves or think about as it relates to that? You mentioned something about operations.
Yeah. To me, I think that a lot of, again, comes down to for many lower middle market businesses, they have a lot of these, what we call tribal knowledge that's either in their heads or in their, their sort of key management heads. And they think a lot of that comes down to getting it down into processes that the rest of the company or the team, can actually take to the next level.
And, and sort of gives you the skeletal framework for how the business runs. And so that is one of the most critical things that I think owners have to learn how to do, in a way to ultimately scale and then have, have ongoing continuity, whether they're in a healthy economic environment or not.
Yeah. I think that's really important from a business standpoint is making sure your operations, your structure, your procedures are there and can live through good and bad times.
But ultimately, I think they they also need to live in such a way where, again, it's not all being funneled through the owner, but that, again, the management team or that the other key leaders, department heads in the business have the ability, they understand it well enough to know how to tweak them in the time and in sort of a downturn.
That's a good point. Yeah. What we do best during this offering is help people know their number. Yes. Right. And this goes into the family and the legacy part of the offering. Obviously, we have a tremendous network of people that can help, you know, business owners add value and work through sales. And you and Mike have just an amazing network in that.
Let's talk a little bit about the importance of, do you even know what your number is?
Yeah. And I think a recession actually gives you sort of, you know, a lens or a time to sort of take a step back and sort of look in the mirror and say, okay, you know, if I didn't have the business for whatever reasons, because I've sold or because, you know, we're going through a difficult time here, like, what do I need to replace the income that I'm drawing out of the company to, you know, live the life that I might want to live if I'm not, you know, operating the business.
Right. And so that comes down to knowing your number. Right. I think understanding what your, your needs are, but also what your wants are, and it really takes a little bit of that sort of even that Mark Twain quote of like reflecting what your why is, where you're getting purpose out of life and trying to quantify.
What does that really mean? Yeah. It's not always the easiest exercise. I think sometimes it's a little bit uncomfortable for us to do it, but it is necessary if you're going to have a successful exit.
So one of the things I like about working in this business and having wonderful partners like you and Mike and Stacey and Meghan and others, is that we all kind of know what our number is. So we're a little bit ahead of the game. We've joked around about it. It is amazing to me, the number of very successful business people and entrepreneurs just aren't really sure what that number is, but that's a really important factor.
Yeah. Now, just because I reach that number doesn't mean I'm going to walk away in the sense that I'm going to feel a lot better at night. Yeah. When I, when I do reach it.
Well, and it does evolve over time. Right. Are you and I were even talking about that the other day because it is how I think it's a healthy thing to just sort of have in the back of our mind. I think it helps us with our just our strategic decision making, as well.
So let's talk a little bit about the offense of defense that business owners can play during a recession. So from a defensive standpoint, you've got, you know, a handful of things that people can do.
Yeah, I think one is if again, if we're thinking of recessions on the horizon, I'm not saying it necessarily is. But first of all, like I like to frame it in terms of sports. So having a bit of a defense which tends to win championships, things we can do. Right. So number one, I would say take a look at your access to capital.
Number one at the business level. Right. So do you have, you know, access to additional capital to shore up, you know, payroll, rent, things of that nature if your revenue's going to going to take a hit. So, go talk to your bank, make sure that you've got that capital on it. And the reality is, for many smaller business owners and lower middle market, they may not have that access to capital.
And so what they need to do, I think is take their bank. Right. So taking a look at their personal finances and seeing, okay, where do I have additional access to capital if I need to infuse it into the business, at least in the short term? I don't think that's necessarily the best long term strategy. But it could be making sure they have, access to a margin account against their, their brokerage account.
They can also look at, again, whether it's at the business level or in, in their personal life, where can I maybe trim back on some discretionary spending. Right. So again, I'm just being far off of how I'm allocating resources. Specifically on the finance side for the business, maybe we can look at our accounts payable and our vendors and can we, you know, negotiate better terms that are just a little more forgiving in the case we run into a bit of a cash crunch?
Can I do this with my landlord if I'm paying rent? One of the other things I would recommend they do is maybe do an offsite meeting with my leadership team and go through a Swot analysis where our relative strengths were, our relative weaknesses, opportunities, and threats, and start thinking about where we might need to have to move the chess pieces ahead of time.
So again, we're being resilient and strategic. A couple other things to think about. Through that Swot analysis, we may come to the realization that we have to have a tough conversation about whether it's with staff that are unproductive or even certain assets in the business. We have to reposition to to let go. It's not always the easiest thing to do, but it may be what's required.
At that time, one of the other things I think to owners can do as it relates to defense, is looking at their revenue. And do they have clients and revenue streams that are recession-proof. Right. And so that diversification of revenue, again, maybe as you're I mean, it may be difficult to do a why you're in a recession, but if you're able to do it as you're going into one or ahead of time, is going to make you much more resilient business.
Yeah. I think, you know, not being reliant on one sole customer or one industry is extremely important for that resilience aspect. So from an offensive standpoint, we talked about one of them earlier. Like do you have the capital to be able to hire and acquire really good talent? Sure. What are some of the other things that you think about from an offensive stamp?
Yeah, I think one is looking at your core services and your offering and just making sure that it's still appropriate for the shifting landscape and the market. Like, for example, in Wharton. Right. We've had our sort of bread and butter clients, that we do through our Morton offering. But then we've added on modern modern as a new service offering because we've identified in the in the market, we've added on strategists who have identified a need in the market.
And we even hired Brian Standing a number of years ago for estate planning.
Exactly. So expanding your scope of services, but one that meets where the market is. I was talking to a consultant separately who was also talking about your messaging to your end user, and I thought it was pretty interesting, which is think of the mindset of those that you're serving as well. And so if we're in a more of a protective environment because we're, you know, there's risk on the horizon, is your messaging around that resonating with where they are as opposed to one that's more maybe expansionary or growth that is maybe more risk taking?
Well, if that's not where their mindset is, it's not going to land from a from a marketing and a messaging standpoint. So I think from again, from an offensive strategy standpoint, think of where your marketing is going and is it resonating with your end client.
And Costco has always had a really good job of that, right? They sell some really high end, expensive products. But the core of this of what they do, it's very affordable and cheap. And I know I can always get a piece of, a slice of pizza or a hot dog at the.
Right price for 3.99. Yeah. I would say the other thing is, if you're going to discount on your pricing, don't just do it reactively. Have a strategy that's with it. And I'll give you an example. You know, if you can secure maybe a large block order, right. That goes with that discounted pricing. Well, you're meeting the pricing need of where your client is.
But for you you're securing that revenue and that certainty that helps you with, with your planning for making the next quarter earnings, for, for maintaining your budget. So, again, just being thoughtful to what your strategy is going to be as it relates to, to any discounting or pricing.
Yeah, I love the conversation around offensive defense because, you know, recessions aren't always bad.
No, not at all.
They're not fun, but they're not always bad. They can be opportunistic.
Because out of one last point on that, and if it if looking at it through the lens of opportunity, to your point, keeping an eye on maybe even your competitors, and if you are long term thinking that acquisition is something you want to do, it's better to buy. And when maybe those businesses are, necessarily operating at their best, you can get maybe a more attractive price for if you're looking at, increasing your market share.
I think I've heard that once before. It's something like below sell something, something like that. Obviously another important component is having the right advisors and the right team in place. So looking at the advisors that you have today to help give you the guidance on, you know, knowing your number, making strategic moves, helping out with deal structure, all of those different things, tax insurance, having the right team in place and continuing to look at that.
Yeah, I think look, look at your team of advisors, and and leverage their experience, leverage their resources. You know, if you're an owner and you're struggling with something, you know, go to them with what it is and get their advice and see who they have in their network and maybe resolve that issue, whether it's related to, you know, again, your human capital, if it's you're dealing with vendor issues, if you're dealing with, you know, if you need more resources on the marketing side, you know, I think we tend to think of our advisors and they we want them to be competent at exactly what they do.
But a lot of the value they can bring to the table is who they know. I think it's a lot of what Mike and I bring to the table and what the other advisors at Morton bring to the table. We're always happy to, bring in other resources to make our clients more successful.
I mean, I even think about the a lot of the asset based lending people that we have access to. I mean, they they do make loans to businesses backed by assets that can help people get through a time of need or make acquisitions.
It’s incredible. Not all of this needs to be around, you know, the financial side of things. I know that you're very spiritual and you think a lot about, you know, personal health. Yeah. What's something that people can do proactively, for themselves?
Yeah. No, I love, love you said and I do believe in sort of a mind body spirit. Existence. I, I'm a big fan of for owners. They got to put their oxygen mask on first, right? I mean, we hear it worn in the airplane, and it's a bit cliche, but I think it's actually really important in the sense that, you know, everybody's going to be looking to you, you know, your employees.
If we're in a downturn, they may be concerned about their jobs, your clients, your vendors, your family, the community in which you support. I mean, oftentimes because the business owners are the leaders, everyone's looking at them. And so I think it's important that you have a system in place, a backup plan in place to essentially take care of yourself physically, to get that stress out, to maintain your mental health, your physical health.
I'm an advocate, of being in sort of peer groups, whether it's a vestige or if it's, you know, a group maybe through church that just allows you to have that human connection, to have that outlet, to have a different perspective to share if things are getting tough at work just so you don't get sort of stuck in, mired in what you're dealing with.
So setting those things up ahead of time, so you're not trying to to deal with that. You already have a system in place that allows you to maintain, I think, a good sense of, presence of rest, of physical and emotional and spiritual balance. I love it.
So we're going to play a little game. Optimist or pessimist? Yep. Ready to have some fun? Yeah.
Joe. Optimist or pessimistic? Okay, okay. Are you an optimist or pessimist? When the market drops 20%, do you see it as a chance to step back or a chance to lean it?
I think once I get through the initial shock, I do believe it's a chance to lean in.
It's definitely hard. Yeah. I came across something that I saw online, so you have to believe everything that you see online, and I haven't been able to vet this statistic, but I'm going to try to use Bloomberg to see it. But Warren Buffett said something that the average swing of any stock in the S&P 500 isn't about 80.
It's about an 80% swing from 52 week high to 52 week low within a 12 month period. I mean, those are some those nominal companies that could potentially swing by that much. So I want to vet that out because if that's true.
I mean that's a huge opportunity.
Market drops 20%. There's a huge opportunity out there. Yeah. But of course I'm an optimist, sir. And then is cutting costs during a downturn is a sign of weakness or a smart strategic move?
I think it depends. And it sounds like such a lawyer.
Yes, but you're not alone.
No I'm not. Again, if you're doing it reactively, I think that's probably a sign of weakness. If it's something again that you have methodically thought about kind of going in, understanding why and how you're going to use that to your long term vision and how you're going to actually, again, create enterprise value out of that. To me, that's opportunistic.
Yeah. It goes back to your your conversation earlier about going with your leadership team and doing a Swot analysis to say, hey, if we're going to go through something like, where can we cut back to, obviously maintain our team, our talent, make some acquisitions, but also from that standpoint, like maybe you can pivot and see something better out of it, 100% having that flexibility to me, again, the eternal optimist creates opportunity.
Yeah, Joe, thank you so much.
