The Cadence of Success: Understanding the Small Business Cycle

There’s a natural rhythm to business cycles, sometimes the melody is smooth and flowing, other times it’s discordant and unpredictable. The tempo is affected by shifting market demands, global events, or evolving consumer preferences, and a multitude of other factors that test a company’s resilience.
The reality is, no sector is safe from these cycles. In recent years, technology startups have faced corrections after periods of high valuations. Energy prices have swung dramatically, rippling through industries like transportation and manufacturing. Interest rates, after a long stretch of historic lows, have begun to climb, affecting borrowing costs. Agriculture, education, and the food industry have all felt the ebb and flow of business cycles. While we can’t control every note or fluctuation, we can influence how we prepare, adapt, and respond when the tune changes.
So, how do business leaders and entrepreneurs stay in sync with these inevitable cycles? Here are some time-tested lessons that can help guide you through the highs and lows.

Build a Resilient Balance Sheet
Warren Buffett advises that businesses with variable incomes should keep substantial cash reserves—suggesting saving up to 40% of annual profits in cash and liquid investments. Setting cash aside in the “good times” provides a cushion that allows you to weather downturns without making desperate decisions or compromising your long-term vision. A strong balance sheet offers the flexibility to survive during challenging periods while potentially seizing lucrative opportunities when others can’t.
Moreover, be cautious with debt. Although tempting, accruing debt can magnify the challenges of a downturn, especially if revenues decline and servicing debt becomes more difficult.
Keep a Cool Head: Maintain Perspective Through Highs and Lows
It’s easy to feel invincible during a business boom, but it’s important to remember that peaks are not permanent. High points are memorable but not the norm. Likewise, during downturns, it might seem like the challenges will never end. Keeping the same balanced perspective helps prevent overconfidence when things are going well and distracting stress when they’re not. As the saying goes, “This too shall pass.” Steady leadership and a calm mindset are invaluable assets.
Keep Fixed Costs Low
One of the best defenses against economic downturns is a lean operation. Fixed expenses like long-term leases, hefty overheads, or high recurring costs deserve special attention because during times of reduced revenue, lower fixed costs mean less pressure on your cash flow. It also reduces the need for drastic cuts that can harm your business in the long run. Greybull once worked with a company that was burdened by an expensive, oversized lease—five times bigger and more costly than what they needed. When revenues dipped, the lease became a significant strain. We were fortunate to negotiate our way out, but relying on luck isn’t a sustainable strategy.
Be Prudent with Staffing
It’s important to grow your headcount thoughtfully. Rapid expansion during business highs can lead to painful layoffs when the cycle turns. By focusing on efficiency and cross-training employees, you can handle increased workloads without proportionally increasing staff numbers. Warren Buffett put up a chart of the headcount in the Berkshire Hathaway insurance operations compared to the premium volume written by year. There were huge swings in premium volume as Berkshire wrote a lot of volume when premium prices were high and wrote very little when premium prices were low (very difficult to execute, by the way). At the same time, the insurance personnel headcount did not fluctuate much.

He explained that he wanted to keep the headcount low as a general rule and also help give those insurance people confidence that they can turn down insurance deals when pricing is low, and not just write volume to stay busy and keep their jobs. Plus, it is just too painful to make big changes in headcount in a down cycle if we let headcounts get too big in good times. This is also very difficult to execute when employees are screaming for help in busy times — which means that a constant effort to find more efficient methods and keep headcount low is important.
Understand Your Financing Partners
Lenders are known to react to industry trends rather than individual business performance. They may be eager to offer loans when your industry is booming but tighten credit when the sector slows down, regardless of your company’s health. It’s essential to cultivate relationships with financing partners who understand your business and can provide support across cycles.
Allan Nation[3] once noted, “Your lenders probably know a lot less about your industry than you do and judge the safety of your loan by seeing how other customers in your industry are doing.” In the early years at Greybull, we experienced this firsthand with a private post-secondary school business. Even though our operations were sound, lenders grew hesitant as the industry faced challenges. Diversifying your funding sources and working with partners who look beyond surface trends can help mitigate this risk.
Keep an Eye on Leading Indicators
A lag between market signals and their impact on your business can be misleading. Stay informed about the health of your customers, suppliers, and the broader ecosystem in which you operate. Early signs of trouble in your supply chain or customer base can give you the lead time needed to adjust your strategies. This proactive approach can help you avoid being caught off guard by sudden changes.

Diversify Your Revenue Streams
Having multiple products, services, or markets can buffer your business against sector-specific downturns. If one area of your business is affected by a cycle, others may remain stable or even thrive. Diversification doesn’t mean losing focus; it means strategically expanding in ways that complement your core strengths.
As Allan Nation wisely said, “You have to have two games going in order to play one well.” There are times when stepping back from a declining market is the best strategy, but it’s difficult to sit idle. Having another venture or revenue stream that operates on a different cycle keeps you engaged and productive, reducing the temptation to make impulsive decisions with idle resources.
Anticipate Regulatory Changes
Regulations often change in response to economic conditions, and sometimes these changes can exacerbate business cycles. Staying ahead of regulatory shifts allows you to adapt quickly and minimize negative impacts. A good practice to adopt with industry associations and maintain open communication with policymakers when possible.
Focus on Customer Success
At the heart of any business are its customers. When your customers succeed, so do you. Invest in building strong relationships, understanding their needs, and helping them navigate their own challenges. Their loyalty and success can provide stability for your business even during turbulent times.
As Nation put it, “What really counts in all forms of business is, ‘How is your customer doing?’ If he is doing well, you will too. If he isn’t, you will eventually feel his pain.” By focusing on adding genuine value to your customers, you create a foundation for mutual success that can withstand economic fluctuations.
Applying These Lessons in the Pre-Middle Market
Mastering these strategies is especially important for companies in the pre-middle market[3]—those that have moved beyond startup status but aren’t yet large-scale enterprises. Such businesses often possess the nimbleness of smaller firms while grappling with complexities more common to bigger organizations. In managing cyclical changes, resilience alone isn’t enough; choosing the right partners who respect your tempo and long-term vision is key. By aligning with a capital provider that prioritizes support over quick exits—like Greybull, whose evergreen structure supports steady progress—pre-middle market businesses gain the flexibility to weather economic storms and seize growth opportunities as they arise.

This approach allows leaders to fine-tune their strategies, maintain operational integrity, and adapt with confidence during the inevitable market and economic cycles.
[1] Allan Nation of the Stockman Grass Farmer is one of our favorite business observers.
[2] Companies valued at less than $25mm in enterprise value with profits in the range of $2-10mm of EBITDA.
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