A new year has begun and with it comes challenges ahead for businesses.
Even though there are signs economic conditions are improving, such as a relatively fast drop in inflation and labour market additions, many small businesses are likely to feel the pinch of rising interest rates, the threat of a looming recession, and persistent labour shortages in 2023.
We reached out to Noah Jensen, a partner at Racolta Jensen LLP in Cambridge, to get a sense of what businesses can expect in the coming year:
Q. What priorities or potential pitfalls should businesses wishing to expand in 2023 keep in mind?
Noah: Keep acquisitions open as an option. There are quite a few business owners with established businesses who are looking to divest themselves into retirement. Lower-mid market acquisitions (say, less than $10 million in value) are starting to see more supply than there is capital for private equity/investment firms to invest, especially on smaller deals. Acquiring an established brand with a customer list and team of trained employees that have complementary customers, production process, and/or supply chain partners can help achieve more scale by eliminating redundancies in the combined business after the acquisition is complete.
Avoid over-committing on cash, or over-hiring of employees. In the start-up world they call this “lengthening the runway” by containing overhead costs. Labour is a fixed cost in the short-term and a variable cost in the long-term, be selective on who is being hired for what as many customers in the business-to-business landscape are being more thoughtful about purchases and many things are being delayed.
Q. How should businesses prepare for potential economic slowdowns this coming year?
Noah: Evaluate pricing. Costs have risen substantially in the past two years and there are still some businesses that have not adjusted their prices to their customers. If you have not changed pricing because your competitors have not changed theirs, you may have an issue with productivity to look at. If the market price has gone up and you have not changed your price, look at a price increase as an option. If your customers are unable to accept a price increase, look at the profitability of the relationship and consider not serving the client any longer.
Be clear on terms of payment with customers and suppliers to think through forecasting your cash flow over the next several months. Look into how this can be done with your accountant and/or bankers to see about a back-stop financing facility if needed. It is generally better to ask for financing facilities when your company is showing good financial results. You will not regret doing so now before things get too grim.
Think through your cost structure for any commitments to experiment with new products or services for your business that you thought would improve the productivity of your business. Are they all working? Is there anything that could be cut?
If you are in the business-to-business market, talk to your customers. What trends are they seeing from your competitors that they like or don’t like? How could you provide a better solution for them?
Do you have any redundant assets on your balance sheet? This would be assets that have no value to the operations of your company that have monetary value.
Q. Will this be a good year for businesses to make productivity investments?
Noah: Productivity investments will need to continuously be considered in today’s economic climate. Whether you are in dairy production or robotics, your competitors are purchasing equipment and/or software that is allowing them to get work done with less labour (a necessity in today’s labour market).
Q. How important is it for businesses to ensure they have a solid succession plan in place?
Noah: It is important to always consider the contingency plan of your business. If you are young with the intention of running your business for the long-term, failing to plan for what happens if you are suddenly disabled or facing terminal illness will put you and your family in a precarious position if any of those events transpire and you are unable to run the company. Certain insurance products mitigate the financial impact of this, but you still need to consider what shape your company will be in if you are eventually able to return to work.
If you are older and considering retirement, you should be thinking about this five-10 years out. Some considerations:
Q. What should business owners consider if they are planning an acquisition in the coming year?
Noah: Be aware of market trends. With uncertainty in the system related to financing costs (interest rate driven) and risk tolerance of people investing in private companies, there will be ebbs and flows in the low-mid-market mergers and acquisitions environment.
According to a recent poll, 2022 Q4 had a pull-back in interest on the buy-side of acquisitions which could indicate that the bargaining power could tilt in the favour of buyers rather than sellers. We have seen a lot of interest in our existing clients wanting to sell. Mainly related to age/retirement.
Be aware of the quality of earnings that are presented. While many people had an amazing fiscal 2022, if you broke it down by quarters, they were increasing prices to their customers faster than they were adjusting their costs for labour. Additionally, certain industries would have been on fire during the low-financing cost era (residential/industrial construction, auto sector manufacturing), that will be facing downturns in the upcoming year or two.
Q. Will 2023 be a good year to start a new business?
Noah: Every year is a good year to start a new business if you have a good idea or good contacts in a particular field. The difficult thing about right now is that people currently employed will probably be seeing the best of the best in terms of offers for their labour time and talents due to the shortage.
The upside to starting a business right now is that a lot of people throw in the towel when there is the amount of uncertainty as there is right now with the changing economic landscape. This creates new opportunities for people.
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