Transitioning businesses find that interest rates can do a number on financing and valuations. If buying or selling a business is your plan in tough economic times, be mindful that it might be challenging to raise capital at a reasonable cost. That said, you may also find undervalued businesses in a down market.
2. Consumer Spending
Generating revenues is crucial to startup businesses. When consumers pull back their spending, sales drop and founders tend to slow down spending on marketing, labor, and inventory. This may turn into a “survival-only” mentality and leave a small business unprepared to catch the upswing when the economy improves.
Growth-stage businesses are normally better positioned to weather reduced consumer spending. They’ve had the opportunity to diversify revenue streams and can switch marketing efforts to products and services that are focused on consumer needs rather than luxuries.
Similar to rising interest rates, a decline in consumer spending resulting in a drop in revenues can decimate business valuations. Sellers will need to lean on other factors to justify their asking price, like intellectual property, reputation, and market position.
3. Unemployment Rate
Recent unemployment reports showed four million more job openings existed than there were workers to fill them. A tight labor market usually means increased labor costs for sub-par labor. This is a bad combination for small businesses trying to compete for top-notch talent. Founders will have to get creative by offering benefits their competitors can’t or won’t.
Stable companies in growth-phase are normally more appealing to employees, making it easier to retain good talent. Conversely, employees with critical skills may become more valuable in the labor market and cause a re-shuffling of the skills deck within a business due to turnover.
Instability in the labor market can make business buyers uneasy. Sellers will need to get creative to reduce the risk of labor migration after a sale. Buyers may also get caught up in the retention game by offering retention bonuses to key personnel who stay after an acquisition.
Keep It Up
So, here I “stand” before you saying, “If you survived the pandemic, you certainly should be able to handle about anything.” I hope we don’t encounter something worse than COVID! But, if we do, remember, Look Up, Buckle Up, and Stay “Up!”
No matter what stage your business is in, keeping watch on interest rates, consumer spending, and unemployment will help get you through.