The Board of Governors of the Federal Reserve System decided to raise interest rates another 25 bps in spite of recent concerns about bank stability. The rational for such a move is that inflation is still not under control and more work needs to be done to return inflation to its targeted level of 2%. Raising rates is the most effective tool the Fed has for lowering inflation. Although these historic rate hikes have exposed weaknesses in some banks, recent statements by both Federal Reserve Chairman Jerome Powell and Secretary of the Treasury Janet Yellen have expressed confidence in the banking system.
We have heard from many pundits since the recent collapse of Silicon Valley Bank and several other institutions that the banks are not in the same shape that they were in during 2008. I don’t think comparing the current situation to the Great Recession provides any significant comfort. That is like saying “well you are only going in for minor surgery”. Adjusting the current state of the economy to a more acceptable rate of inflation will be surgery for all of us to a greater or lesser extent.
What does it mean for publicly traded companies? These companies usually operate over a short term horizon thanks to the quarterly reporting requirements, a hallmark of our financial reporting system to increase transparency. If the top line is affected by any attempts to slow the economy, the people running these companies need to protect the bottom line in some manner. That is usually done with cost cutting and unfortunately, much of the immediate cost cutting comes in the form of layoffs.
While it may be necessary for many companies, both publicly traded and privately held companies to lay off employees in 2023, private companies, especially companies in the middle market have a distinct advantage in that they are not subject to quarterly reporting requirements or having their “temperature taken” every 90 days.
That does not mean that private companies don’t need to take the current situation and the possibility of a recession in the near term seriously. Warren Buffet once said: “It's only when the tide goes out that you learn who's been swimming naked.” The tide may be heading out.
What specifically should private companies do? In one sense, it is no different than what they should have been doing all along. One of the objectives of a private company is to create value for its owners. Let’s try and put some description on that. Value is different than profits. Hopefully, profits are earned in the day to day running of the business. Creating value is what is necessary to ensure the long-term sustainability of those profits and work towards the organization operating with less dependency on any one individual, including the owner, customer or supplier. Value means focusing on business fundamentals. These are areas such as Sales, Marketing, Finance, Operations, Planning, Customers, just to name a few. Value is also different from growth. Although increasing value may make growth easier to achieve, many business owners are not interested in growing the current business, but I contend that every business owner is interested in increasing the value of the business. The question an owner should ask at the end of every week is “what value did we create this week?”
Given these unusual times, I would like to offer five (5) business owners, in the lower middle market (defined as revenue of at least $5M to $100M) to allow me to interview them next week (week of 3/27) and take a value assessment. I don’t need the financials necessarily. A valuation could be performed in addition to this offer. That can be done, but it is beyond the interview I am offering.
The Value Assessment would identify potential areas of improvement and opportunities to create value. It is not a canned report, it is a questionnaire I have developed and a report I prepare, which is why I am offering it to only five business owners for next week. I think it is my contribution to the circumstances we are in and the offer is free of charge. There is no obligation other than a 30 – 45 minute interview over zoom.
If you are interested, please feel free to contact me at Jcox@northbridgebusiness.com. I will send back an e mail with some suggested times for next week.
About the author
Jack Cox is the Founder of NorthBridge Business Advisors. He brings over 40 years of business and management experience to his practice and the clients he serves. Jack serves the business owners and their stakeholders with growth strategies, valuations, M&A advisory services and exit planning consulting. He has worked both independently and in coordination with other business brokers and investment banking firms on sell and buy side transactions.
Jack’s previous career included roles as chief financial officer for several companies with significant operational responsibility. He has experience in multiple industries, including large consumer electronics distributors, real estate, mortgage, insurance, health care, franchising and manufacturing. He began his career with PricewaterhouseCoopers and worked in offices in the United States and Australia.
He earned his undergraduate degree from the University of Scranton, an MBA from Regis University and a post graduate Certificate in Finance from Fairleigh Dickinson University. He is a Certified Public Accountant, a Certified Exit Planning Advisor, a Certified Business Broker, an Accredited Business Intermediary, a chartered Global Management Accountant, a member of the AICPA’s Forensic and Valuation Services Section and a licensed realtor.
He remains connected to the communities he serves as a member of the Finance Council for the Diocese of Paterson. He has served on his town’s Board of Adjustment and as past President of the Board of Trustees for Employment Horizons. He was named “Volunteer of the Year” by his town of Morris Plains, NJ. Jack lives with his wife, Lisa in Morris Plains. They have two grown children, who live and work in cities on the east coast.