As we move toward the beginning of a new year, it is helpful for middle-market business owners to look ahead at the emerging trends and other factors likely to affect their businesses and consider how to best position themselves for success. They should be prepared for the possibility of continued volatility and keep a close pulse on three key issues: interest rates; employee retention and compensation; and pricing.
First, a few points to bear in mind: As far as the mergers and acquisitions market is concerned, if the fourth quarter is consistent with the first three quarters of 2015 as it appears to be, 2015 should be down from 2014 in terms of M&A. This may come as a surprise to some people. Moreover, there is no reason to think that 2016 will be a better year.
Additionally, there is no doubt that 2015 has been a year of significant stock market, currency and resources volatility. Some technology companies have gone public with fanfare and high expectations, but their stocks have not performed as well as they had hoped. Some unicorns (private companies valued at more than $1 billion) may be overvalued. In the second half of the year, some companies priced their initial public offerings below the price of their last private financing rounds. The question now is: are we looking at a potential bubble in certain sectors? It may be too soon to know for sure, but it is certainly possible.
Based on our experience assisting middle-market business owners through all types of economic cycles, the following are a few important issues that might affect business as we head into 2016.
Interest rates rising. During the past few years, there was speculation that interest rates would rise, but they did not. Now, with much warning and the U.S. economy in many sectors heating up, the rate increase is here. Although it is a minimal increase, it will be important to consider how to deal with any consequences. It also will be important to consider the impacts of any additional increases in 2016 as well as the environment that may result. The Fed was clear that the rate increases will be probable, gradual and measured, and neither predictable nor consistent.
If you are planning to sell your business any time in the next five years, now may be the time to pull the trigger. With interest rates beginning to rise, there will be an increase in borrowing costs and reduction in the price that buyers may be willing to pay as leverage becomes more costly. Moreover, today valuations are relatively high and private equity firms have lots of money to invest — all of which may not last.
Employee retention challenges. As unemployment continues to decline toward full employment, employers should be concerned about their ability to continue to attract and retain top talent. Today in many areas, there is a shortage of a trained, educated labor force. It would be wise to give some thought to enhancing compensation packages and employee retention initiatives. You may need to set up a training program. Bottom line: If you want to retain quality talent, you should make sure your employees are happy and engaged. Otherwise, you risk losing them to competitors or other companies, which is likely to cost you more in the long run.
Accurately pricing your products and services. As unemployment continues to decline and employers have to continue raising wages in order to retain their employees, it will be critical to ensure you are properly managing the pricing of your products and services. Specifically, you must closely watch your ability to raise your prices so you can retain margins without losing business. Although low costs of resources such as oil and a strong dollar have kept costs down, it may not be enough. For example, if you had to raise everyone’s salaries in the organization by 25 percent, can you continue charging customers today’s prices or would you have to reduce your service levels if you could not raise prices? How would this affect customer satisfaction and sales? In addition, it will be critical to minimize your expenses and other costs.
Further complicating matters for middle-market business owners, 2016 is an elections year. Therefore, it will be important to keep a close pulse on the hot-button issues, including the tax code, defense and immigration, and consider their likely impacts on the middle market and specifically on your business.
One of the areas that business owners, particularly the owners of small- and mid-sized businesses, tend to neglect is strategic business planning. While they may have the best intentions to do it, they often get so caught up in managing the day-to-day activities of their businesses that they fail to allocate the necessary time and resources for this critical task. Without a doubt, ensuring maximum success in 2016 will require planning and also remaining nimble and flexible to respond to changing dynamics. Those who do so stand to gain a significant competitive advantage and position their businesses to overcome the obstacles and seize the opportunities in the year ahead.
James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies. He may be reached at firstname.lastname@example.org or LinkedIn at https://www.linkedin.com/in/jamesscassel. His website: www.casselsalpeter.com