Many business owners are wrestling with today’s uncertain economy, including the high-interest rates which are at a 40-year high. And the threat of a recession still looms. Obviously, we would all welcome a stable economy, and for many of us, memories of the Great Recession still linger unfavorably. As the saying goes, ‘we must learn the lessons of the past’.
Just like the tides that come and go, so do market cycles. When the tide is in and water levels are high, what lies at the bottom of the waters is concealed. Similarly, a good market conceals the risks in a business. When the tide goes out, the troubles at the bottom can be seen, they must be addressed.
This newsletter, then, is meant to be a reminder to owners who are feeling good about their businesses today: In good markets, the risk is concealed and sometimes ignored, perhaps to our peril. Let’s not allow the lessons of the past recession to be forgotten so quickly.
Let’s Begin with Market Timing – A Ten-Year Transfer Cycle
Market conditions can dictate how much of the risk in our businesses we can see at any given time. Markets run in cycles and timing reveals and conceals risks. Businesses perform well because of favorable economies. During good times, valuations are high, employees are engaged, and, oftentimes, buyers and investors have a high degree of interest and activity.
As the chart below indicates, the last three (3) decades have followed a common market cycle and this decade is following suit.
Today we are in an uncertain market and, perhaps, we are nearing the end of this current cycle. Some prognosticate that this current market may last beyond 2023, perhaps reflecting more of the trend seen at the end of the 90s; growth faltered, job creation slowed, the stock markets plunged, and the groundwork for the 2001 recession was being laid, thus ending the economic boom of the 1990s.* Although unemployment is expected to stay low, below 5%, in 2023, both consumer and business confidence has been waning. Regardless of the exact timing, most owners agree on two (2) important points – First, that another recession will appear, whether that is this year or later, and second, that the drop in the economy happens a lot faster than the slow build-up of growth.
What Does a Good Market Concealing Risk Look Like?
When markets are growing, businesses are strong, and we see less of the risks that exist in our businesses.
For example, regarding your employees in a good market, B and C players on your teams are not critically reviewed because work is so busy you need bodies just to complete the jobs. Since good markets make it difficult to attract top talent, today especially, we’re experiencing an unprecedented challenge in finding and retaining good talent, this type of difficulty helps to conceal the risk that poor performers place on your business.
Banks are another example. Today, banks are lending and looking to deploy their capital, especially now that the once historically low rates are being impacted greatly by the Federal Reserve’s incremental raising of interest rates over the past year, since March 2022. Banks now can increase their earnings as they lend out cash. This leads to a sense of comfort with leverage and, perhaps, some forgetfulness about challenges with repaying debt during a recession.
Owner-Dependence Adds to the Risk/Fragility of Any Privately-Held Business
An ongoing, national survey of business owners takes a measurement of the dependence that a company has on the owner. The average overall score is 54%. This means that business owners largely add to the risks that are concealed in a good market, by having their businesses be highly dependent upon them. These owners:
- Are very involved in the day-to-day running of the business
- Do a majority of the hiring, managing and firing of employees
- Plan for the company’s strategic direction by themselves, with little to no input from others
- Do not share their company results with anyone except their accountant (and what they choose to tell the IRS)
- They are involved in writing checks, running payroll, paying bills, handling accounting
- Are personally liable for the debts of the business
- Oversee the business performance with little delegation or empowerment to managers
If you are doing many of these activities in your business, in a good market this is further concealing the risks that exist in making your business more transferable to someone else because it is highly dependent upon your individual efforts. Again, good markets can conceal this, while poor markets may reveal it.
What to do Next?
Are you a business owner who is sitting on risk that you just don’t acknowledge? Is the current economy aiding to this easy-to-fall-into trap for you and your business? And, if this is the case, what might be your motivation to act?
This newsletter recommends that you remain objective, try to see the bigger picture, critically examine how much of your wealth is tied to your illiquid business, and give some consideration to the idea that there is more risk in your business than you can currently see. When you think and act in this manner, there is a higher probability that you will not allow the current economic climate (whether you are personally experiencing a good time or a bad time in your business) to dictate to you the success and value of your business. Instead, it is time to be pro-active in finding and addressing those hidden risks, and perhaps, in so doing, you work to protect your overall wealth.
*Source: 1990s United States boom