Business Owners Beware!

Wealthbar Ad
IRC Photo - Low Resolution
Ian Campbell

By Ian R. Campbell, Business Transition Simplified

Special to the Financial Independence Hub

I recently read a headline that said Business Owners Need To Be Very Afraid. The first line or two of the article paraded a litany of things that were unlikely to frighten a business owner’s dog, let alone a business owner.

However, while the article content was uninspiring the article title was “on the money.” The heading I have chosen for this post likewise wouldn’t frighten a business owner’s dog – but only because dogs can’t read.

If you are a business owner or an advisor to business owners here is a list, with brief reasons, of six things you need to keep front of mind and continually update your opinion on.

Government debt

Debt is higher than it has ever been in most developed and developing countries at the municipal, provincial/state and federal levels. Governments at root are no different than individuals, households or companies – unless of course you are an American who thinks the U.S. Federal Government can print new fiat currency forever without consequence.

Eventually, Peter can no longer rob Paul and debt needs to be repaid. How: by levying multiple forms of taxes on those who can pay. Businesses almost certainly will see both direct and indirect taxes at all levels increase in coming years. This is but one factor that will negatively impact business after-tax free cash flows – and in the end it is current and prospective “after-tax free cash flow” that is the most important business value metric.

Industry consolidation

Increased taxes, technology advances and increased importance of business size with resulting synergies are and will continue to result in ongoing business consolidation in many industries. That consolidation in turn will result in economies of scale and lowered operating costs.

Resource (commodity) prices

For most commodities the lowest hanging fruit has been picked. That means that absent depression future commodity prices – including oil – will be pushed higher over time. In turn, that means material costs for many companies will increase – where in some cases they will unable to pass on those some or all of those increased costs.

Technology advances

Very importantly, technology in the industrial and service sector workplaces is advancing rapidly. Although the speed and extent of technological change will vary by industry and service sector, broadly those advances will impact productivity positively and employment negatively. This will result in businesses, to varying degrees, having to commit more of what otherwise would be their “free cash flow” to capital expenditures in order to be product price competitive. It will also result in reductions in Main Street consumer spending – the backbone of the gross domestic product of many economies. In turn this will negatively impact consumer product companies directly, and many other companies indirectly.

World population

The current world population is estimated at 7.2 billion, up from 2.0 billion in 1930. It is estimated to hit 10.0 billion by 2050. We live in a finite world with finite resources. A number of possible consequences arising from population growth can be envisioned – none of them good in a world of rising unemployment in the face of predictable technological change.

Climate change

Ongoing climate change is going to result in increasing costs related to environmental change – fresh water costs being but one example. Governments at all levels will be forced to look to business to cover more and more of these increasing costs where Main Street consumers likely will be less able to do that.

But all is not necessarily bleak. In every environment some businesses flourish while other flag. Recall the saying: To be forewarned is to be forearmed. Think of the foregoing as “forewarning.” Consider what you can do in your specific business to be forearmed.

I suggest that as a minimum in our current globalized, economic and financial market new normals you immediately work to strengthen your balance sheet and “batten down the hatches” on your operating costs wherever possible. That has to good advice in any scenario, but I believe it to be particularly good advice in our current and prospective business environment.

I also suggest that in the face of the foregoing business owners over 50 years of age immediately, if they are not already doing it, strategize and plan for business transition. When doing that understand that business transition is a term that covers both (1) arm’s length sale of your business, and (2) generational business ownership and management (two quite different things) transition. Many business owners procrastinate over business transition. They need to stop procrastinating now.

Ian R. Campbell is a leading Canadian business valuation and transition consultant. He recently wrote and published the book 50 Hurdles: Business Transition Simplified. You can find out more about both him and that book here

Leave a Reply