Recession Lessons

So, what have we learned from this recession? According to the government statistics, we are in recovery, but I have visited with a lot of surveyors that are having a hard time finding that reality in their own businesses. Most survey firms, especially small ones, are inextricably tied to the housing market, and whether that means mortgage inspections surveys, land development, or just surveys tied to real estate transactions—as the housing market goes, so goes the surveying business. The housing market tends to lead us into recessions and out of recessions as well, but this time around there was such a severe collapse in that market that it will take some time for things to get back to anything resembling normal.

I was well into business by the time of the deep recession of 1979-1981. Symptomatic of that recession was also a complete stop in housing development driven by extraordinarily high interest rates and the accompanying tight credit. Not dissimilar to the current problems, although without the inflation and high interest rates, the effect is similar.

Then as now, there is a significant lag in recovery of the housing market compared to the rest of economy, and if your business is tied to land sales and development, it’s going to be a while for any recovery to have any positive effect.

So let’s start out by looking at what lessons I have learned from these two severe recessions.

Don’t Get Over-leveraged

When things are going well, it’s very easy to be tempted to grow the business by borrowing, and that works fine as long as business stays strong. Now, there is nothing wrong with debt, managed properly. In fact, it’s nearly impossible to grow and expand a business out of cash flow. The reason is quite simple: there is always a lag between earning income and receiving income (the reason for accrual accounting, by the way). While some business that are very well managed can grow slowly without debt, it is quite the exception. The businesses that get in trouble are those that are seduced by a robust economy and go out and borrow lots of money (credit is easy) on the premise that business will continue to be strong.

However, the business cycle has inevitable recessions, and if they are severe and they strongly affect housing markets, bad things come in bunches. First, revenue dries up or dramatically slows. Second, receivables pile up. Third, creditors start demanding payment. Fourth, businesses are faced with layoffs, but without a proportionate reduction in total operational costs. Finally, as a result of all this, the revenue cannot continue to support the debt service, and businesses begin to fail.

Had these same businesses been a little more fiscally conservative, they might have survived. There is a balance to be found between debt and cash flow, and when the debt load starts to get disproportionately high, there is a real danger of failure when the inevitable business downturn comes.

Diversify or Specialize

Back in 1980, I was one of five partners in an engineering/surveying firm, and pretty much all we did was land development. When interest rates spiked (prime rate at one time was 19.5 percent, and mortgage rates were in the 17-percent range) housing development came to a screeching halt, and we went from 28 employees to 9 in about two months. That’s expensive! Of course all the bad things mentioned above happened, and although the business somehow survived it became very apparent that being totally dependent on land development was a bad deal. Since that time, diversification has become a major part of my business philosophy and has helped me survive the current situation.

Diversification can take many forms. For instance, all but the smallest firms can seek public sector work, which can buffer the ups and downs of the volatile housing market. While the public contracts tend to dry up over time as agency budgets shrink, there is a significant lag, and it may be long enough to allow other markets to rebound and turn the whole situation around.

Diversification can also take the form of offering more than pure land-surveying services. Such things as on-site septic design, storm water management, civil and structural engineering, environmental permitting, GIS, and project management are all naturally related to the land-surveying business, and mixing additional products along with mixing markets can really ameliorate the highs and lows of a business tied strictly to the housing market.

Of course very small enterprises simply can’t diversify and stay small. An alternative, particularly for very small land surveying businesses, is to specialize or segment the market. Since there is little opportunity for very small operations to diversify, it’s entirely possible to position your business to be the very best in your service area at a particular segment of your market.

For example, a good friend of mine in Tucson, Arizona, has carved out a specialty in ALTA surveys. He is just a one-man shop with very high-tech equipment and an outstanding knowledge of how to deliver ALTA surveys in a cost-effective and timely manner, and he makes very good money doing it. He is known in his area as the go-to guy for this service, and it’s about all he does. As this recession developed he actually did pretty well, because there were still plenty of commercial real estate transactions, albeit for reasons other than those that brought the surveys to him when times were better.

What could you, the small-time operator, do like that? Could you perhaps get really dialed into environmental surveys, or pipeline work, or precision deformation surveys, or industrial alignment processes, or high-definition scanning, or control surveys, or oil-field work, or GPS data collection, or something else? This is almost the opposite of diversification but could stand you in good stead when the economy turns sour. Being a generalist can work for large firms, and being a specialist can work for very small firms, but typical of a lot of things, being a middle-of-the-roader is generally being just that, and becoming tied to volatile markets is dangerous business strategy.

So what have you learned from this recession? Will you prepare yourself for the next one? I’m hoping I’m retired by the time the next deep one comes.
Dan Beardslee has been a licensed professional surveyor since 1975 and is a graduate of Washington State University with a degree in business administration. He has been an employee, a partner, and an owner of land surveying businesses since 1973 and is the author of numerous publications, including Business Management Handbook for Land Surveyors.

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