We get asked by clients all the time what we expect to happen over the next 12 to 18 months. The answer is “uncertainty”. However, that does not mean all expectations are in the dark and 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 at a minimum, and more likely a full recession.
Bank underwriting has started to tighten. While deals are still getting done, more in depth due diligence is occurring. We are seeing banks dive one or more levels deeper into:
• How are inventory purchases managed and the right levels to carry determined
• How have lines of credit 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 COVID bump and/or bubble has or is likely to occur
While M&A multiples have declined from a broad sense, buyers are still plentiful, and deals are still getting done. There is however heightened scrutiny, especially revisiting the growth prospects for the prospective seller.
Very much in line with our mantra of Living Sale Ready, it is most certainly a best practice to ask these questions of your own business. Do you understand your downside? Have you explored a scenario of slow to no growth for 2023, or possibly even a decline? Does how you make decisions on expansion opportunities, capital investment, or even operating investment like inventory purchasing need to be scrutinized further? One of the best lenses that any business can be viewed through is an outside eye – it exposes flaws, blind spots, and outdated assumptions.
This is very different from the black swan event that was the onset of COVID a couple years ago. That is something almost no business was truly prepared to take on. 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-ifs. Maybe a bank renewal is on the horizon or new financing is needed. You will be much more prepared going into the negotiations and even if that is not a factor. This line 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 micro and macro-economic forces are at work. Some of the greatest opportunities in business occur in down cycles. Asking tough questions may just be the key to grabbing your share of them.