Adventures in micro-business: Survive recession through spending and saving

Professor Russell Smith answers your queries, and profiles a small business facing a big challenge
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The Independent Online

Is it true that some businesses buy their way out of a recession?

Large companies often buy "recession protection" by acquiring other companies in an attempt to spread risk through diversification. The management team needed for the merged company is usually smaller than the sum of those for the individual businesses which also reduces costs. Small businesses rarely have that opportunity, but can use the option of "related networks" instead. For example, a plasterer and a plumber could agree to work together in order to access a broader range of customers. In addition, related networks have lower fixed costs compared to larger businesses and so can usually offer better prices to clients.

What is entrepreneurs' relief and how does it affect small businesses?

When an entrepreneur sells a business the gain made from that sale will be subject to capital gains tax. The rules on capital gains changed this year with the introduction of a flat rate of 18 per cent. Under the previous regime, an entrepreneur could have paid as little as 10 per cent. Entrepreneurs' relief addresses the disparity and can reduce the liability from 18 per cent to 10 per cent for the first £1m (a lifetime limit) of capital gains. There are some conditions that apply, so you should talk to an accountant about how your circumstances will affect your level of relief.

Are there simple things I can do to protect my small business if the economy goes into recession?

The things that a business owner should do to protect against recession are often exactly the same as those always done by owners of successful businesses. Start with a financial "health check" to see where you can cut costs. But don't, as so many business owners do, take an immediate pay-cut yourself. This should only be a last resort, otherwise you are just fooling yourself about your business' viability. Pay particular attention to any products or services that sold poorly in 2008 – drop poor performers and back the winners. Overall, your aim should be to keep costs as low as possible and to maximise profit. A lean and yet profitable business will always fare better in a recession, especially if it can be flexible and act quickly when new opportunities arise.

Would it be sensible to try to sell my company in the current economic climate? If so, what things should I be thinking about?

When a private company is sold, the sale price is usually determined by a combination of its assets (such as its premises) together with an assessment of its ability to generate profit. The component of the purchase price arising from this assessment can take the form of some "multiple" of annual profitability and varies between business types. The buyer will want evidence that profitability from previous years will continue forward into future trading. With signs of an impending recession emerging almost daily, this may be your biggest challenge. You will need to argue that your business is less likely to suffer than others in a recession in order to make it attractive. Evidence in the form of a full order book, stretching well into the future, would be helpful. Talk to your accountant about your plans at the earliest opportunity and also seek advice about tax planning.

Send your questions to Russell Smith at independent@businessboffins.com. Selected questions will be answered each month. Answers are for the general guidance of owner-managers only; always seek professional advice. Professor Smith is the founder of Oxford-based Business Boffins Ltd which, in collaboration with Oxford Brookes University Business School, delivers support programmes to small businesses nationwide. Independent and Independent on Sunday readers can enrol on the university-accredited programme at a discounted rate; see www.businessboffins.com/independent.

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