Be Prepared for Tough Questions, and Ask Them Yourself
We are often asked by clients what we expect to happen in the near future. The answer is “uncertainty.” However, that does not mean all expectations are uncertain or that a business cannot plan. We are already seeing certain trends in the market that are likely to continue. Most notably is the scrutiny that businesses are likely to undergo, as we are in the midst of a slowdown, and potentially a full recession.
Bank underwriting has started to tighten. While deals are still being completed, more in-depth due diligence is occurring. We are seeing banks dive deeper into:
- How inventory purchases are managed and the right levels to carry are determined
- How lines of credit have historically been managed
- Historical fluctuations in margins and underlying causes
- How susceptible the business is to changes in interest rates
- The labor force—turnover and wages
- The health and buying patterns of customers—including analyzing volumes, not just revenue
- Corporate overhead, fixed costs, and breakeven sales
- To what extent a market or sector has seen a temporary spike and whether it could be sustainable
While M&A multiples may have declined from a broad perspective, buyers are still plentiful, and deals are still getting done. There is, however, heightened scrutiny, especially when revisiting the growth prospects for the prospective seller.
In line with our mantra of Living Sale Ready, it’s always a best practice to ask these questions of your own business. Do you understand your downside? Have you explored scenarios of slow to no growth, or possibly even a decline? Should your approach to expansion opportunities, capital investment, or even operating investments like inventory purchasing be scrutinized further? One of the best lenses through which any business can be viewed is an outside perspective—it exposes flaws, blind spots, and outdated assumptions.
This situation is very different from the unforeseen black swan event that was the onset of COVID. Almost no business was truly prepared for that. Times like these are about how a business manages ordinary business cycles, which is exactly what a recession represents.
Ask these questions of yourself and your team. Take the time to model out some “what-if” scenarios. Maybe a bank renewal is on the horizon or new financing is needed. You will be much more prepared for negotiations—and even if that’s not a factor, this way of thinking will help you run your business better. In the face of uncertainty, the best course of action is understanding key drivers and alternatives. This allows a business to be proactive instead of reactive as both micro and macroeconomic forces are at work. Some of the greatest opportunities in business occur in down cycles. Asking tough questions may just be the key to seizing those opportunities.
