Last week, the stock market experienced its biggest drop of the year on the news that there was something called a yield curve inversion. This is when long-term debt instruments provide a lower return than short-term debt instruments. I have no idea what that means but two people I never heard of on CNBC said that a yield curve inversion is a warning that a recession is coming.
The news in the legal sector has not been good lately which also suggests that there will be an economic slowdown. The American Lawyer reports that law firm margins are tightening. And the news of LeClairRyan’s dissolution is also a sign that law firm profits are falling from their peak or will one day.
For most small firms and business owners, a recession happens when our customers are struggling to pay us but our creditors expect us to struggle so they can be paid in full. Here are a few things smaller practices can do to minimize the negative impact of a recession or worse.
Have a cash reserves and have a line of credit. This will ensure you will have cash to pay bills when your income drops. Ideally, you should have a liquid emergency fund for at least a year.
Set up a line of credit with a bank. If you already have a line of credit, request an increase on the limits. Do it now when you don’t need it because lenders will be very cautious about extending credit to people during a recession.
Ultimately, having access to funds will allow you to pay the bills and possibly make major purchases at a discount.
Consider starting a recession-friendly practice area. During a recession, certain specialties will be more attractive such as bankruptcy, debt-settlement, or contingency-based litigation.
But if you are a newbie, you should work with an experienced lawyer and split fees in a manner permissible in your jurisdiction.
Collect money from clients and collect it now. This seems obvious but I have seen businesses struggle or go under because they did not do a good job collecting from their clients or their customers. This happens for a number of reasons. Sometimes people are too busy to collect, thinking the client will pay on their own. Other times, people don’t want to anger the client and risk losing business in the long run. Clients have to be reminded regularly because if they don’t they will usually not pay.
If you don’t collect and continue to do work, you will run up a bigger bill. When you finally have the time and the nerve to ask for payment, the bill might be so high that the client will be too scared to talk to you. Or they might start nitpicking about that value you provided to them in the hopes that they can pay you less than what they owe.
But try to offer the client options if they really are struggling. If they are genuinely trying to pay, then give them a break and give them some time to get back on their feet. On the other hand, if the client is constantly breaking promises to pay you on Tuesday, it’s best to cut your losses and to cut them loose.
Reevaluate your marketing strategy and budget. One of the biggest unknown factors in any business is marketing. So if you pay for marketing, you should evaluate whether you are getting your money’s worth. Have those newspaper ads or the SEO guy you hired resulted in paying clients? If not, then you should think about whether it is worth it to continue paying for them. If you threaten to cancel, you might be able to negotiate a lower rate.
But don’t cut back on marketing entirely. Many people will be looking to cut costs wherever possible and will shop around to see if a cheaper alternative is available. While attorneys don’t want to be known as the discount lawyer, consumers will be focusing more on getting more for their money.
Finally, be extra thankful to your referral sources and to those who have helped you develop your business.
Cut costs, but only when absolutely necessary. A recession may provide opportunities to purchase more for less. Look for deals on office supplies, insurance coverage, and telephone and internet services, as companies will offer specials to get you to switch.
On some major expenses, you might be able to find a good deal but the drawbacks may outweigh the cost savings. A good example is office space. While you may pay lower rent, the office may be smaller, have less benefits, may be further away from your ideal clients, and may have undesirable co-tenants or landlords.
A recession may lead to better deals but don’t cut costs to the point where you are throwing out the baby with the bathwater.
Finally, if you want to find a job, secure one now. Some people like being self-employed. Others do not and are self-employed out of necessity. If your dream is to work for someone else, start looking now while job opportunities are out there. You are doing yourself and possibly your clients a disservice by working a job that you don’t like, even if you are the boss. When the recession comes, jobs will be scarce as companies will not only institute hiring freezes and layoffs, they will be very picky about who they hire. As some of us know painfully well, if you miss the boat now, another won’t come for a very long time, if ever.
To ensure a smooth transition, you will need to do a few things. First, research the company’s hiring practices. During a recession, do they typically lay off the new hires? Or do they lay off more senior staff? Avoid positions that do the former because you are not only at a higher risk of losing your job but if you do lose your job, you might also lose the book of business that you worked hard to obtain. How do you get this information? You may need to ask recruiters or people who used to work for the company. Or you can ask the company representative directly.
Second, have an exit plan in place. Assuming you cannot take your existing clients to the new firm, do not accept new clients who are likely to take up a lot of time. Try to delegate work to support staff or contract attorneys and supervise them until the cases are complete. Finally, you may need to transfer the remainder of your clients to an attorney willing to take them. This will cost you money.
No one knows when a recession is coming, so it would be prudent to prepare for one. But at the same time, we should continue to live and enjoy our life. The time spent worrying about a recession is time that can be used to do something productive. Using the recession as an excuse to be overly cheap can alienate relationships which can do a lot more damage in the long run. So until that day comes, remember this: keep calm and carry on.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
Joe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news.
Kathryn Rubino is a Senior Editor at Above the Law, and host of 
