Business Challenges Call for Assessment

With the exception of the pandemic dip in 2020, many business owners have enjoyed a “bull” economy for nearly 15 years since the onset of the financial crisis of 2008-2009, but are challenged by a combining number of headwinds as we head into 2024. 

The past three years have seen relief programs such as the Employee Retention Credit and Payroll Protection Act, among others, help the U.S. economy remain on stable footing through the pandemic and its after-effects, and have headed off the impact of some of the concerns with supply chain, labor force, and credit availability for business owners. As those programs wind down, business owners now must navigate the challenges without any bridge programs and with the timeframe to address some of these headwinds now measured in weeks or months instead of years. 

One concern business owners have expressed to us is the increasing cost of capital, especially in the commercial and multi-family residential real-estate marketplace. Regulations within the banking sector limiting the amount of credit available for banks to extend has caused most banks to focus on assisting their existing clients, though the interest rates charged have increased significantly since pre-pandemic rates as low as 3 percent on term and revolving debt. New rates from banks north of 8 percent significantly curtail businesses cash flow, especially for companies that cannot easily pass along increased costs to their customers due to multi-year purchase or lease contracts. 

Businesses are in turn compelled to secure new forms of financing, which can include higher interest-rate debt from alternative lending sources and can carry rates north of 10 percent. For businesses in industries with thin margins, these increased debt-service costs impact cash flow and the companies’ ability to maintain the financial metrics necessary to meet borrowing covenants on existing and new debt. 

The second concern, while not as high as it was a year or two ago, that is still recurring is the ability to find good talent. Businesses are competing with a continued talent shortage as the Baby Boomers continue to retire, especially in the skilled trades, and must factor in both compensation and other benefits that their competitors are using to attract and retain talent. Wellness benefits and continued compensation increases create pressure to retain employees; remote work availability can increase the pool of potential jobs that candidates will consider, in some cases pitting local employers against businesses in higher cost-of-living areas where they can pay higher compensation. 

The Boomer retirements impact company owners as well—a consequence of the 2008-2009 financial crisis is that some business owners retained ownership longer to either rebuild company value or rebuild outside investment losses due to stock-market declines. Business owners face a similar challenge exiting now, compounded by the increased cost of capital, which is making it more challenging for either an internal succession plan or outside investor to use leverage in any transfer of ownership. 

A solution that business owners are navigating given the turbulence in the economy, if they plan on continuing to operate their business in the mid- to long-term, is to diversify into new industry verticals or geographic markets beyond those they operate in currently. Owners have been both acquiring controlling and non-controlling stakes in other entities to grow, but also, subject to limits of the availability of talent, greenfielding businesses in new industry verticals or geographic markets. 

Business owners are also considering, more readily than many did in the financial crisis 15 years ago, expediting transition plans to either bring the next generation of their family into ownership and management, or to sell the business to either private equity or another business owner operating in or seeking to enter their industry. 

The uncertainty for business owners is growing, and with a divided government in an election year, there is no sign of additional government relief on the immediate horizon.