Revving Up for Slow Times

Staring down a deepening recession, what's an Austin small-business owner to do? The consensus advice: Get out in front of it, before it rolls over you.

PeopleFund, the leading nonprofit small-business lender in Austin and Central Texas, helps entrepreneurs who contribute to broader community economic revitalization. Many of its clients operate on thin margins; on Nov. 24, PeopleFund sent a letter encouraging all of its 94 clients to seek help and offering advice: Watch accounts receivable; cash is king; keep creditors informed; evaluate your clients. Jaime Noyola, director of lending, said PeopleFund is reaching out to support all of its small-business, nonprofit, and affordable-housing clients but especially those that were in trouble "before all this happened." He's hearing from restaurants and small contractors already hard hit and asking them, "What can they cut, and how fast?"

Noyola is advising small construction companies with little or no work to consider liquidating assets like trucks now, because new construction has dried up: "Deals that were bankable eight months ago, banks won't touch them now." He added, "We advise our clients against incurring debt, because we don't know how long or deep this will go." PeopleFund is increasingly seeing referrals from banks of their existing customers, for whom they can no longer renew lines of credit due to tightened lending requirements.

Entrepreneurs succeed because they're an upbeat, can-do bunch, but in an unraveling economy, reflexive optimism cuts both ways. A report commissioned by BMO Bank of Montreal found that while 92% of small-business owners believe in their ability to withstand financial difficulties, almost two-thirds are so confident that they have no contingency plan in place for what to do in an economic downturn. Fortunately, Austin has several nonprofits like PeopleFund that offer classes and supportive services, and the city's Small Business Development Program also offers free help to local small-business owners needing to retool their business plans for 2009. (See "Helpful Small-Business Resources," below.)

The nonprofit SCORE (Service Corps of Retired Executives) offers free counseling from experienced business executives in four Central Texas locations, as well as a podcast series available online. "Overextended owners short on staff may become spread so thin they don't take time to plan, but that's a key mistake," advises Sabrina Parsons of Palo Alto Software, in a SCORE "Planning in an Economic Downturn" podcast on www.sbtv.com. "To sit down and take time away from the business just to plan may not seem so smart, but especially for small businesses, it is."

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Declining Sales and Sales Taxes

Nationally, the entire retail and restaurant sector is in major freak-out mode. In October, U.S. retail sales plunged by 2.8% – the largest drop on record, worse than the November 2001 then-record decline that followed the 9/11 terrorist attacks. But analysts pointed out the drop was primarily in cars and gasoline; excluding those categories, retail sales fell by just 0.5%. In the first two weeks of November, several major retail categories fell about 20%, according to the most recent data available at press time in a MasterCard Advisors report.

For Austin shopkeepers and restaurateurs who normally may do 30% of their business during the holiday season, hopes are not merry and bright. Nationally, Wachovia Economics Group has predicted that holiday revenues, including those from online shopping, will fall below 2001 levels. The National Retail Federation predicted a 1.9% spending increase over 2007 but bemoaned it as the smallest in six years. Standard & Poor's ratings services has predicted that holiday retail sales will decline 2% across all categories.

In Texas, the state comptroller reported that state sales-tax revenues were up 5.2% in October, over October 2007 – those collections reflect September sales. (September tax revenues, on August sales, were up 3.7%.) But in retail establishments (the category includes restaurants and bars), October collections were just $747.7 million, a 5.9% decrease from the same month the previous year. Austin isn't immune – in November the state made a sales-tax payment to the city of just $12.8 million, down from more than $14 million the prior year, a steep decline of 8.8%. For 2008 as a whole, state sales-tax payments to Austin are down 0.05% – bad news for the municipal budget. High-end eateries that depend on expense-account diners report dramatically reduced tabs and empty tables; one established fine-dining restaurant reported that revenues suddenly plunged 30%.

With Texas sales tax hurting, some activists are calling on the comptroller to begin collecting sales tax on online sales – a tactic the state has avoided, under the argument that Web economic development is more important than taxes. Others want a cap on the amount of state sales tax rebated to a single large retailer (generally as an incentive for collecting the tax on time). According to a study by Washington, D.C.-based nonprofit Good Jobs First, Texas rebates $89 million – making it second among states for allowing retailers to retain the most sales-tax revenue. The lack of a cap particularly benefits large chains such as Wal-Mart. The Good Jobs First study found that the country's largest retailer, Wal-Mart, has received $130 million from such rebates nationally, to date. Leveling the playing field on sales tax could also offer a boost to local small businesses.

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Survival Mode

While painful, a recession is unlikely to truly bankrupt most entrepreneurs. Historic data on Travis County provided by Brian Kelsey, economic development coordinator for the Capital Area Council of Governments, shows steady annual growth in the total number of small businesses, from 1998 to 2006. In all categories – businesses with fewer than 10, 20, and 50 employees – the numbers have increased each year, an encouraging trend. The one exception, Kelsey notes, is that "businesses with fewer than 10 employees experienced negative growth in 2001, which implies that they may have been disproportionately hurt when the last recession hit." About 70 disappeared. Yet in 2002, 630 new businesses appear in the "under 10 employees" category; that 3.8% growth rate, in fact, is the highest experienced by any single category in one year. One reasonable conclusion: If this recession proves no worse than 2001, it may weed out weak operations but soon create new opportunities.

Of course, statistics only speak in generalities. To assess what's really happening in Austin, I talked with an assortment of small-business owners around town – some with new start-ups, others established Austin icons. To a remarkable degree, their instincts have already led them to take the steps recommended by professional advisers, e.g., judiciously cut expenses, increase efficiencies, market tirelessly, make sure every customer/client feels valued, deliver exceptional service, never cut quality. Bob Phibbs, author of You Can Compete: Double Sales Without Discounting, encourages stores to go local with their marketing: "Look at casting a smaller net with more regional, local or even neighborhood media." Parsons similarly advises against advertising cutbacks but suggests, "Make sure that you really know your market, and that you're focusing on your most lucrative customer segment."

More oft-repeated professional advice that local indies echo: Recognize that competition accelerates in a downturn; expand lower-priced products or services, for which recessions typically bring a countercyclical increase in demand (hot dogs, not steaks). Ask vendors to lower prices or extend payment terms. For well-established businesses with cash, a recession can yield opportunities to acquire struggling competitors or related companies; it's also a great market to "trade up" on staff by acquiring available talent while letting weaker employees go.

We'd expected, given the severity of the economic and financial system news, that we'd find most small-business owners feeling grim and anxious about their survival. Instead, we discovered savvy entrepreneurs who are confident in their own resilience, their business sense, and their loyal customers to get them through – and confident they'll see prosperous times ahead. May they all thrive.

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Strait Music: Opportunities in a Downturn

"I'm worried about it, but I think we're going to be fine," says Robert Strait of the economy. "I don't think Austin is going to be hit as hard as other places." Founded in 1963, the family-owned Strait Music (www.straitmusic.com) has two growing Austin locations, more than 45 employees, and revenues spread across sales and an instrument-rental business. So far 2008 has been a good year, with revenues up 8% to 15% each month over 2007 – although high-end instruments stopped selling for a few weeks in October. "We're lucky that business has been so strong; we've built up a war chest," he notes.

Strait believes he and other small-business owners have advantages in a down economy over corporate competitors: "I know the business; I've spent my whole adult life here; I'm hands-on in all areas. I can make final decisions so I can react quicker." Strait has already survived the worst without laying off any employees, he points out – such as the devastating 1981 Memorial Day flood at the Lamar Boulevard store and a second high-loss flood in 1991. "That beats the hell out of surviving one year of recession, even if we see a 20 percent downturn."

Recently Strait scrutinized his expenses line by line, then negotiated better deals on necessities like Dumpster service: "Vendors are more motivated, vying for your business now – use that to your benefit; get them to give you a deal; shop around!" He's seizing opportunities created in the downturn, such as acquiring deeply discounted merchandise from a bankrupt competitor. "But we're not cutting anything that would affect customer service or the quality of our products," he emphasizes, nor will he slash his marketing budget. "One of the biggest mistakes you can make is to cut back in advertising and promotion. You have to be strategic and really watch everything you spend, but even in a downturn, we keep up our community sponsorships – things like the HAAM benefit that we do every year."

For newbie entrepreneurs without deep cash reserves, he offers seasoned advice: "You've got to have a plan for what to do if things do turn south for a while."

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A Trip to Bountiful: Making More From Giving More

"Thank goodness I started this small!" says Becky Nichols, looking around the cozy A Trip to Bountiful Bakery & Cafe (www.atriptobountiful.com), an oasis of bed-and-breakfast-style charm in a Bee Caves Road strip mall. "Having the lower overhead of a smaller space really saved me." As a new entrepreneur, Nichols worked as her own "bookkeeper, dishwasher, and maid" – a skills set still useful in a tightening economy. If business drops off and she has to cut expenses, she can do it all again. But for now, she says, prospects remain bright. Although she'd anticipated just seven employees in her business plan – developed over a year and a half of research – Nichols now has 14 employees for her diversified cafe, bakery, and catering business.

After losing her 5-year-old daughter, Libbie, to leukemia in April 2004, Nichols drew on "grief energy" to plan and finally open A Trip to Bountiful. She directs a percentage of profits to the Loving Libbie Memorial Foundation, which helps children living with cancer; she also takes hot dishes and cakes to a pediatric oncology clinic and a hospital ward. That charitable mission, which employees and customers have embraced, is at the heart of Nichols' business and her only form of marketing: "I can tell you this: The more I give, the more I make."

At a city of Austin Meet the Lender event, Nichols connected with banker Greg Garner, who eventually provided her financing through Omni Bank: "That relationship has been phenomenal, very important at every step." She also received business mentoring through SCORE Austin (a nonprofit counseling small businesses) and took entrepreneurship classes through the city's Small Business Development Program. While she has a line of credit available, for a cushion, "I have tried really hard not to rely on it. By being disciplined, I get through a lot of things without borrowing." This fall she has continually reminded employees to watch expenses and held off on buying extra supplies or new equipment.

As consumer spending drops, "I'm not trying to build the storefront foot traffic as much; I'm ensuring I have enough food going out the back door" to steady catering customers. She adds: "I worry about the places that only sell one thing, like cupcakes. What happens when they're not cool anymore?"

"In my heart of hearts, I think I'm going to be fine," she says. "All the diligence we've used, in starting a risky type of business, will get us through whatever might come next."

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HCS Salon & Spa: Keeping the Doors Open

"It's getting to the point [that] I can't meet my rent unless I get the traffic up in here," says Renia Harris, owner of HCS Salon & Spa ( www.hcssalon.com). "People need a haircut. But the other services we offer are a luxury. In this economy, we've slowed down considerable. It's kind of scary."

Nov. 22 marked Harris' one-year anniversary at the Mueller Regional Retail Center, after 30 years on the East­side running the successful Hair Corner Salon. "The economy wouldn't even bother me if I was in my old location," says the personable Harris, who remains bullish on Mueller. The move fulfilled her dream of having an upscale, full-service salon and doubled her space, but it tripled her monthly overhead.

"We're in a stuck place," Harris admits. "My business plan was based on filling six out of the eight chairs. Right now I can keep only four stylists part-time, besides myself." In addition to hair styling, the salon offers massage, facials, skin care, manicures, and pedicures, but weak demand for those "luxury" services has made it hard to keep staff. Citing the classic Catch-22 of a start-up, Harris said she's working too hard to aggressively ramp up her marketing as the recession deepens: "I spend most of my time behind the chair, trying to earn enough income just to keep my doors open." She's invested precious capital in advertising, even offering free services to mothers at the nearby Ronald McDonald House, but hasn't seen business pick up.

Fortunately, Harris has nonprofit lenders invested in her success. She received assistance and financing from BiGAUSTIN and several city of Austin departments and programs. "I like working with the city of Austin, because it's really a relationship," Harris said. "I had so many people help me at the city, and it just made a tremendous difference." Recently they eased her loan repayment terms. She's also talking to her landlord, Catellus; the handful of small, locally owned businesses at Mueller pay full market-rate rent.

Although Harris is reluctant to mention it, a racial divide may be the invisible obstacle to filling HCS chairs. The multiethnic salon has predominantly – but not exclusively – African-American stylists and clientele. The surrounding retail center (which has many empty spaces) and the Mueller neighborhood have yielded few new clients. "It has been a big issue," Harris admits. "Caucasians walk in, see African-Americans, and turn around and walk out."

"It's challenging, but I'm so hopeful it's going to turn around!" says Harris, whose faith helps her stay positive. "I'm a fighter, not a quitter. I will do anything to save my business!"

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BookPeople & Waterloo Records: Cross-Pollination

As the longtime proprietors who have survived decades of industry, economic, and competitive challenges, John Kunz of Waterloo Records & Video (www.waterloorecords.com) and Steve Bercu of BookPeople (www.bookpeople.com) are unshaken by the current economy. Chatting in the BookPeople cafe recently, they talked about how their unique stores' strong local Austin character makes them more recession-proof.

"Customers understand they really do need to patronize us, or the booksignings and in-store performances could go away," said Bercu. "We're curators! About 80 percent of our customers don't know what they want. They trust us to pick out the best new books to put on the shelf. It's the same with music over at John's store; people rely on the knowledgeable staff."

While both enjoy the status of tourist destinations, Kunz noted that when traffic at the Austin airport declines, they can feel it at their cash registers. "Customers are looking for values in the store, more than in better times," he observed. "The breadth and depth of our inventory is the draw, so we need to keep that and cover those costs but give discounts when we can." As a collaborative effort with other independent record stores nationally, Waterloo also has added a digital download store to its website.

Few businesses can beat a recession by becoming "curators of culture," but Kunz and Bercu offered advice crucial to their own survival that applies to any industry. "Try to find others in your business to partner and share ideas with, best practices, cross-pollinate," urged Kunz. "For someone new running a microbusiness, the thing you don't have is time – but it's worth it to join peer associations and talk to people with similar problems and solutions."

"Join the Austin Independent Business Assoc­i­ation," advised Bercu, an AIBA founder, pointing out that its members pull together and help one another. "Research shows shoppers will specifically seek out a locally owned business, so let them know that's who you are. There's quite a consciousness about supporting local business here; people actually do show a preference."

Both proprietors plan to continue their charitable community involvement, despite the economy. This holiday season, Waterloo will once again sell up to three-quarters of the annual KGSR Broadcasts CDs, which have raised more than $1 million for the SIMS Foundation. While the project doesn't cover his costs, said Kunz, "We get the love and goodwill of all those people."

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Design It With Consignment: Reverse-Cycle Retail

Lisa Gaynor's upscale recycled furniture store, Design It With Consignment (www.designitconsignment.com), resulted from the last recession in 2001. Laid off by Motorola, she followed a path appealing to many corporate employees "freed" in a downturn: going into business for herself.

The beauty of a consignment business is that it's reverse-cycle retail that tends to thrive in a recession, notes Gaynor, citing industry statistics. As a confirmed "consignment shopaholic" living in the Chicago area and Texas, she'd unwittingly been researching her store for years, as she resale-shopped across eight states. After her layoff – with a new house to decorate, plenty of time, and limited cash – Gaynor haunted local furniture-consignment stores, where she began learning the business in earnest. She opened her 4,000-square-foot space off South Lamar on Memorial Day weekend of 2005, after getting city help developing a business plan and obtaining a Small Business Administration loan.

Gaynor's retail business was up 40% in August, over 2007; although it fell in September, it was back up 18% in October and up about 28% in November. "People who wouldn't 'buy used' are now considering it," reports Gaynor. She has 25% more consignors, yielding 50% more stock than a year ago – a boon to business. "People are cleaning out their garages and storage units," she reports. "They're digging deeper into what they're giving up." Since September, consignors have shown more concern about how soon they can pick up a check. She's also had a few sad desperation calls – people hoping to get fast cash for their used mattresses or by selling one lamp. Although customers are spending less on each visit – leading her to stock more inexpensive "smalls" – her overall sales volume has increased. Still, she says, "I'm considering every financial decision under a microscope right now and holding my breath through the Christmas season."

Like Nichols at A Trip to Bountiful, Gaynor has learned the wisdom of a diversified book of business. She's benefited from expanding into rentals, especially to "staging" services that fill vacant real estate. They've proved a built-in marketing force, connecting her to people who are moving and will need permanent furniture soon. She's also adding delivery service, as another revenue stream. Her suggestion to entrepreneurs whose traditional business is drying up: "Think about what other things your customers are looking for that are right on the edges of what you do."

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Juan In a Million Never Cut Quality

After 28 years, restaurateur Juan Meza isn't letting a mere global financial meltdown dim his optimism. "I know it's bad out there, but luckily we're moderately priced, and we live in Austin, Texas!" he says with his signature warm smile. Juan in a Million (www.juaninamillion.com) hasn't felt the downturn, yet. "People have to eat. It's cheaper to eat breakfast tacos with us than to go and buy groceries," he says. "Even if there's a ripple effect, we'll be one of the last to feel it."

Meza says he feels secure in his solid base of customers, many attracted by his generous community involvement over the years. He has always given back to Eastside schools and community groups and supported political campaigns and nonprofit causes. He and his wife grew their business very gradually, adding catering, making improvements with cash, not loans. Four years ago, Meza was able to acquire the property next door; his microbusiness tenants provide another stream of income.

Still, Meza knows the reality of hard times. "In the real estate bust of the late Eighties, we hurt like everyone else," he remembers. "We can tighten our belts, because we own the place and the property. But one thing I've learned, through all these ups and downs, is never cut quality." Even if business drops, "we try to keep everybody – we'd maybe cut back a little on everyone's hours rather than laying people off." Running one restaurant (2300 E. Cesar Chavez) profitably "is a lot easier that worrying about five stores. More isn't always better."

"Longevity means a lot," he muses. "People know us, so it's easier for us to survive." What would he advise worried young entrepreneurs with less experience? "They need to keep their mind strong. Continue treating your customers well; be attentive to their needs – I always let them know I appreciate their being here." Indeed, he's famous for greeting customers personally.

As for the tight credit market, "When times are tough, you can't depend on banks as much, because the help is not there. You have to depend on yourself. In a downturn, it's survival of the fittest. But the people that make it are going to come out stronger. If you can survive this, you'll do well in the prosperous years." With a judicious smile he observes: "This economy is offering life experience you can't learn in the Red McCombs School of Business."

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Helpful Small-Business Resources

Small-business owners can tap these city and nonprofit organizations for free or low-cost ­counseling, classes, workshops, referrals, and other resources.

Small Business Development Program, City of Austin

974-7800, www.cityofaustin.org/sbdp

The city's Small Business Development Pro­gram supports new and existing businesses by providing free information, advice, classes, and other tools; its Business Solutions Center offers resources, technology, computer stations, and staff (1 Texas Center, 505 Barton Springs Rd., open Monday-Friday, 8:30am-4:30pm). The BizAid program offers help with business development and accessing capital; there are multiple classes in December and January. Online, SBDP's Gold Pages offer a directory of area services from other organizations. Three business owners profiled for this article spoke highly of the help received from SBDP.

SCORE Austin

928-2425, www.scoreaustin.org

SCORE is a national nonprofit association dedicated to the formation, growth, and success of small businesses by counseling small-business owners and educating entrepreneurs. SCORE Austin provides confidential business counseling and advice to entrepreneurs and start-ups; most counseling services are free, and they're provided one-on-one by about 40 volunteers who have business expertise. Workshops are offered for a nominal fee.

BiGAUSTIN

928-8010, www.bigaustin.org

BiGAUSTIN assists underserved entrepreneurs in Central Texas, offering comprehensive education, tailored business counseling, and flexible loans. It's the area's "leading non-profit micro-enterprise development organization." Workshop topics in December and Jan­u­ary include Access to Capital, Understanding Financial Statements, and Understanding Cash Flow. Infor­ma­tion sessions on Dec. 12 and 19 explain the Big Idea Day and Business Plan Competition; the winning submission (deadline Feb. 20) earns $10,000 in start-up cash.

Austin Independent Business Alliance

441-2123, www.ibuyaustin.com

AIBA is a nonprofit that promotes locally owned businesses; its mission is to shift more Austin spending to locally owned, independent businesses. Members assist one another with business-to-business networking, advice and support, and sharing problems and solutions. Programs include happy hours and luncheons, special events, Independent Business Invest­ment Zone promotions, a member directory, and "I Bought Local" stickers.

ACCION Texas

866/312-3771, www.acciontexas.org

With the largest microloan portfolio in the United States, ACCION Texas provides business loans to both start-up and existing businesses. It helps microentrepreneurs strengthen their businesses, stabilize and increase their incomes, create additional employment, and contribute to local economic revitalization. In Austin it's dispersed nearly $4 million through more than 500 loans since 1999.

PeopleFund

469-5848, www.peoplefund.org

PeopleFund assists the underserved and ventures that have a strong positive community impact. It offers loans and free financial consulting and support services to its clients, who can receive assistance with marketing, budgeting, accounting, and legal needs and setting up advisory boards. For the public, it offers a range of small-business classes and workshops.

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Making Local Easy

This week, City Council Member Sheryl Cole issued a call for Austin residents to include small local retailers in their holiday shopping. "Money spent at local Austin businesses stays in the Austin economy and keeps our tax base strong," stated a city of Austin release. "Supporting small retailers this holiday season ensures not only terrific and unique gifts, but also sustains Austin retailers in the fluctuating economy." The city was announcing the launch of ExploreLocalAustin.org, an interactive Web map that makes it easy to find indie-biz shops in six different areas of the city. For more on the local economic benefits, see "Austin Unchained," Nov. 21.