There seems to be a consensus that Canada and North America will be under tough if not recessionary times in the latter half of 2023. Having weathered the rollercoaster of the past two years, we appreciate the concern business owners are feeling as they will no doubt face yet more twists and turns in the new year.
The good news is that we are not in the same economic state that we were in during the recession of 2008/09. Pierre Cléroux, VP Research and Chief Economist with the BDC, notes that although we are observing an economic slowdown in Canada, that our country is still growing. Canada continues to export a substantial number of commodities at higher prices which is helping to drive greater business investment, our unemployment rate is lower than pre-pandemic levels, consumer consumption remains relatively strong supported by increased wages and overall, consumers still have substantial savings. In his opinion, all these factors bode well for Canada, in comparison to 2008/2009.
The bad news is that we are still feeling heightened uncertainly about how the balance of year will play out. With the central bank expecting growth to be weak through the rest of the year and inflation rates hitting a 40-year high, some business owners are finding themselves in a situation where they do not have the ability to pass on these costs to their customers. Additionally, the simple cost of doing business and investing continues to be high with the Bank of Canada implementing aggressive interest rate campaigns, aimed at stabilizing inflation.
So, what can you do as a business owner to prepare for the balance of 2023?
Plan Proactively via a Dynamic Financial Model
Although we experienced significant uncertainty in the early days of the pandemic, there is a noticeable difference from where we are today, in that we have greater visibility on what the future may hold.
During the pandemic, decisions had to be made very quickly and without a lot of information. For some owners, this was an extremely challenging time to navigate. What we saw in our practice, is that businesses who had dynamic future-oriented financial models and growth/restructuring strategies were able to quickly run various scenarios, enabling them to make decisions quickly, from staff cuts, reductions in capital expenditures, to complete business model pivots. Furthermore, business owners were able to seek out subsidies and access financing more quickly.
In looking ahead, business owners must proactively plan for various contingencies, from sales reductions, wage increases, interest rates increases, etc. Companies should be prepared to make decisions based on that data, and proactively anticipate the specific actions that will be taken given certain scenarios.
In recessionary times, you need to make decisions quickly. Having a 12–24-month three-way financial model (balance sheet, profit & loss, and cashflow) with the ability to stress-test or change your assumptions will help support not only the tough financial decisions you may need to make, but also the strategic/growth-oriented ones as well.
Protect and Grow your Value
Not all businesses and industries will be impacted equally by these tough economic times. Some companies will not make it, while others will thrive. Be proactive with the strategy that is right for your business, your employees, and your customers.
To protect your value or grow your value, consider the following strategies in your plan:
- Companies may need to access alternative capital in the form of debt or equity to help them stabilize or grow. Being able to demonstrate or show your company’s viability, growth trajectory and how the cash will be used is extremely important. The starting point in telling your story is your financial model coupled with a narrative on the business (business overview, strategic plan, etc.). Have conversations early with your trusted advisors on the cash flow needs of the company and understand the potential financing available. Owners often underestimate the time that is required to get financing, so these discussions should be percolating with your finance teams early in the new year.
- Mergers and Acquisitions activity will likely increase, as companies look to grow via acquisition, increasing their market share, talent pool, and their ability to compete post-recession. Determine early on, if growth by acquisition will form part of your strategy and then collaborate with a trusted advisor to help identify opportunities, perform valuation and due diligence work, source capital and structure the deal to set you up for success.
- There may be a reluctance to sell your company if we slip into a recession but know that there is, and always will be, a market for good businesses that want to sell. If you are contemplating an exit, ensure you understand what your business is worth by holding a competitive process and remember, it is never to early to start to prepare for your exit.
We at Welch Capital Partners, are here to help you understand, maximize and capture value during these uncertain times, by navigating your complex growth and exit options. As we look at the balance of 2023, we are fastened tightly in our seat belts, riding that roller coaster. We know that some of the ride may scare us, but we believe, parts of the ride will completely excite us. Our hope for all of you, is a very exciting and prosperous 2023.
There seems to be a consensus that Canada and North America will be under tough if not recessionary times in the latter half of 2023. Having weathered the rollercoaster of the past two years, we appreciate the concern business owners are feeling as they will no doubt face yet more twists and turns in the new year.
The good news is that we are not in the same economic state that we were in during the recession of 2008/09. Pierre Cléroux, VP Research and Chief Economist with the BDC, notes that although we are observing an economic slowdown in Canada, that our country is still growing. Canada continues to export a substantial number of commodities at higher prices which is helping to drive greater business investment, our unemployment rate is lower than pre-pandemic levels, consumer consumption remains relatively strong supported by increased wages and overall, consumers still have substantial savings. In his opinion, all these factors bode well for Canada, in comparison to 2008/2009.
The bad news is that we are still feeling heightened uncertainly about how the balance of year will play out. With the central bank expecting growth to be weak through the rest of the year and inflation rates hitting a 40-year high, some business owners are finding themselves in a situation where they do not have the ability to pass on these costs to their customers. Additionally, the simple cost of doing business and investing continues to be high with the Bank of Canada implementing aggressive interest rate campaigns, aimed at stabilizing inflation.
So, what can you do as a business owner to prepare for the balance of 2023?
Plan Proactively via a Dynamic Financial Model
Although we experienced significant uncertainty in the early days of the pandemic, there is a noticeable difference from where we are today, in that we have greater visibility on what the future may hold.
During the pandemic, decisions had to be made very quickly and without a lot of information. For some owners, this was an extremely challenging time to navigate. What we saw in our practice, is that businesses who had dynamic future-oriented financial models and growth/restructuring strategies were able to quickly run various scenarios, enabling them to make decisions quickly, from staff cuts, reductions in capital expenditures, to complete business model pivots. Furthermore, business owners were able to seek out subsidies and access financing more quickly.
In looking ahead, business owners must proactively plan for various contingencies, from sales reductions, wage increases, interest rates increases, etc. Companies should be prepared to make decisions based on that data, and proactively anticipate the specific actions that will be taken given certain scenarios.
In recessionary times, you need to make decisions quickly. Having a 12–24-month three-way financial model (balance sheet, profit & loss, and cashflow) with the ability to stress-test or change your assumptions will help support not only the tough financial decisions you may need to make, but also the strategic/growth-oriented ones as well.
Protect and Grow your Value
Not all businesses and industries will be impacted equally by these tough economic times. Some companies will not make it, while others will thrive. Be proactive with the strategy that is right for your business, your employees, and your customers.
To protect your value or grow your value, consider the following strategies in your plan:
- Companies may need to access alternative capital in the form of debt or equity to help them stabilize or grow. Being able to demonstrate or show your company’s viability, growth trajectory and how the cash will be used is extremely important. The starting point in telling your story is your financial model coupled with a narrative on the business (business overview, strategic plan, etc.). Have conversations early with your trusted advisors on the cash flow needs of the company and understand the potential financing available. Owners often underestimate the time that is required to get financing, so these discussions should be percolating with your finance teams early in the new year.
- Mergers and Acquisitions activity will likely increase, as companies look to grow via acquisition, increasing their market share, talent pool, and their ability to compete post-recession. Determine early on, if growth by acquisition will form part of your strategy and then collaborate with a trusted advisor to help identify opportunities, perform valuation and due diligence work, source capital and structure the deal to set you up for success.
- There may be a reluctance to sell your company if we slip into a recession but know that there is, and always will be, a market for good businesses that want to sell. If you are contemplating an exit, ensure you understand what your business is worth by holding a competitive process and remember, it is never to early to start to prepare for your exit.
We at Welch Capital Partners, are here to help you understand, maximize and capture value during these uncertain times, by navigating your complex growth and exit options. As we look at the balance of 2023, we are fastened tightly in our seat belts, riding that roller coaster. We know that some of the ride may scare us, but we believe, parts of the ride will completely excite us. Our hope for all of you, is a very exciting and prosperous 2023.
