Companies are too quick to lay off employees in a recession, one entrepreneur says. Instead, they should focus on retaining valuable 'human capital.'

• About 20% of layoffs and discharges in the US in October were at the country's smallest businesses.
• Ryan Niddel, a serial entrepreneur, argued that layoffs aren't always a quick fix for companies.
• Instead, he said, business owners should look at other ways to cut costs.

This year, as the US economy has prepared for a recession, at least 52 major companies have laid off workers, including Meta, BuzzFeed, Amazon, Shopify, and Twitter.

It's not only behemoth companies that are cutting staffers — businesses with fewer than 10 employees represented about 20% of layoffs and discharges in the US in October, according to the Bureau of Labor Statistics.

But Ryan Niddel, a serial entrepreneur and growth specialist, argued that layoffs aren't always a quick fix for a company facing uncertainty.

"Human capital is something that a lot of entrepreneurs are too quick to get rid of," he said.

Here's why small-business owners should be cautious to cut staff — and other areas where they can downsize instead.

Loyalty can be an economic advantage

Amid a worker shortage, many small businesses have had difficulty filling open positions. Richard Bliss, a finance professor at Babson College, said a recession could abate that problem.

"If most of their need for people is driven by growth, and if the recession impairs that, then the demand for people is going to be less," he told Insider.

While analysts think an economic downturn next year would probably be different from the brief pandemic recession of 2020, Bliss said there could be some parallels.

"During COVID, a lot of small-business owners didn't lay off at the pace that larger companies did," Bliss said. He attributed that outcome to the closer relationships business owners have with their employees. "It's more of a family environment," he added.

Bliss said it also makes more economic sense to keep the workers you have. Laying off employees might help a company in the short term, but over time many business owners realize it's more difficult to maintain company culture and expensive to rehire.

"They understand that there's a bigger cost to laying off and rehiring," he said. "The culture of the company is critical, especially if it's a company of five or seven people."

Niddel said founders who keep employees during an economic downturn could reap the benefits later. "Those people will become incredibly loyal if they realize they still have a place to land," he said.

There are other places to cut costs first

Lowering expenses can be a necessary step in hedging your business, but Niddel suggested entrepreneurs consider other categories before payroll.

"There are so many ways to keep driving things forward versus just arbitrarily cutting staff," he said.

To start, analyze recurring expenses such as subscriptions, software, and utilities to determine what's a necessity and what's a luxury. If you can't close your accounts, try to negotiate lower rates with your vendors — for example, landlords may be willing to defer your rent.

Niddel also recommended hiring a third-party auditor, especially for a young startup. "It's a great way to catch things that you might not know to look at," he said. "There could be small amounts of money leaking out in places you didn't even know to look."

Consider pay cuts before layoffs

Niddel said that if your company has made all other possible cuts and still can't afford payroll, salary cuts are another option.

"If they've been a part of the company, they might be willing to take a reduction in compensation if they need to," he said.

Cate Luzio, the founder of Luminary, learned this when she faced an 80% drop in memberships in her network platform at the beginning of the COVID-19 pandemic. She said she was honest with her employees about the company's finances and gave them a choice between layoffs, furloughs, or pay cuts of 20% — and they all chose the latter.

But Niddel said it's not enough to ask employees to take a pay cut if the founder isn't doing so as well. For example, Luzio and her chief operating officer took larger pay cuts than the rest of the staff.

At the end of the day, employees appreciate transparency. A Luminary staff member previously told Insider that she was content taking the pay cut if it meant continuing her career in a work environment where she felt valued.