July 6, 2014 in City
Small Talk: Small-business owners learn recession lessons
For some small-business owners, the Great Recession turned out to be a lesson in how to run their companies better.
Many owners whose businesses failed during the recession have taken the plunge again, restarting or opening new businesses. But they’re not repeating past mistakes. Their companies are leaner, smarter and less risky.
There are no definitive numbers on how many small businesses failed during the recession. But there were 337,303 fewer companies with fewer than 499 employees in 2011 than there were before the recession began, according to the Census Bureau. The government hasn’t released more recent statistics, so it’s not known how many new companies there are, or how many owners went on to start new businesses.
Here’s how some of the companies are making sure they are more recession-resistant:
INTERNET, NOT INVENTORY: Let someone else take the risk. That’s the lesson Frank Muscarello learned from the recession, and the strategy he’s used in building MarkITx, an online marketplace where companies from Fortune 500 corporations to the smallest businesses can buy and sell refurbished computers, servers and other high-tech equipment.
Muscarello started Chicago-based MarkITx in December 2009, right after he lost his previous business, Vision Point of Sale, in a bankruptcy auction. That company failed after its bank suddenly demanded collateral on a $3.5 million loan during the credit crisis in 2008. While Muscarello had cash registers worth millions of dollars, the bank considered them almost worthless because they couldn’t all be sold within 90 days. Without collateral, the bank called the loan, and because Muscarello couldn’t quickly sell his cash registers, he didn’t have the money to repay it.
“I never wanted to be in the inventory game again,” Muscarello says.
MarkITx doesn’t hold any inventory. Its website lists equipment for sale and helps sellers set a price. The company takes payment from buyers and holds it in escrow until the machines are delivered. It also arranges for equipment to be shipped to a separate company that inspects it and refurbishes it. The website, which began operating in April 2011, has more than 2,300 users.
MarkITx is less vulnerable to economic downturns, Muscarello says.
“I need an inventory-less business model to really grow,” he says.
SCALING BACK AND RESTARTING: Mark Viggiano has improved his restaurant’s chances of success this time around by scaling back. He’s serving only dinner, not lunch, at Viggiano’s BYOB, and is closed Mondays, typically a slow day at restaurants.
The Italian restaurant reopened in the Philadelphia suburb of Conshohocken a year ago after failing in 2009. By cutting its hours and opening only at its busiest time, Viggiano has lowered overhead costs. He employs a smaller staff. Since most customers make their reservations online, he no longer needs a hostess starting early to take phone calls. He’s working in the kitchen, what he loves to do. The changes allow him to have a staff of 14, down from 55.
He has time to do his own food shopping instead of having it delivered, saving more money.
Viggiano also renegotiated his lease and got his rent lowered.
These steps have boosted Viggiano’s cash flow, which was hurt when customers dined out less during the recession. High rent and a heavy debt load also hobbled the restaurant. So did big sporting events that lured customers away to sports bars on weekends, his most lucrative nights.
Slow nights don’t worry him now.
“I used to say, ‘I’m going to jump off the bridge tonight.’ Now I can take a hit like that,” he says.
LIVING WITH SLOWER GROWTH: Total Home Supply’s revenue isn’t exploding like co-owner Mike Luongo’s previous company, AM Royal. He’s not complaining.
AM Royal, which sold major appliances like washers and dryers, thrived with the housing market boom. Sales surged from $2 million in 2004, its first year, to almost $10 million four years later, and the Fairfield N.J.-based company expanded to rent a second warehouse. But it went bankrupt after housing’s plunge caused revenue to drop by more than 50 percent, to $5 million in 2009.
Luongo and two business partners have a more cautious approach with Total Home Supply, which focuses on selling cooling and heating equipment, including air conditioners.
By limiting major appliances and furniture to 25 percent of the business, they’re not dependent on the housing market. This company is also leaner. The partners have negotiated better deals with manufacturers, so their expenses are lower and their profit margins bigger.
Revenue at Total Home Supply was $2.5 million last year, up from $1 million in its first year, 2010. Luongo says it might reach $4 million this year.
“I feel very comfortable about the direction we’re in,” Luongo says.