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How to Navigate Your Business in This Volatile Economic Environment

Mar 31, 2023

As part of the Solutions InSight Session series, the EisnerAmper Wealth Management team covers multiple variables affecting the economy and markets. In this video, leaders will learn about solution-based practices in budgeting, maintaining business growth, managing cash flow, rewarding key employees and exit planning.


Larry Seigelstein:Hi, my name is Larry Seigelstein. I'm with EisnerAmper Wealth Management, a managing director here. Today I'm joined with Bill St. Clair an investment advisor with Wealth Management, as well as the CPA partner in EisnerAmper Advisory Group. Today we're really here to talk about the economic environment, about what's going on, and the impact that it might have on the business and the business owner.

First of what we really wanted to talk about, Bill, is what are those factors out there that are affecting the economy, and the business, and also on our personal level. We talk about the fact that, obviously, a hot subject right now is inflation, everybody's talking about it. Jerome Powell was on the... Spoke to us yesterday about where things are going. His projection is that, of course, they'd like to get inflation down to 2% and I know you want to touch on that.
Bill St. Clair:Right.

LS:But, the fact is that right now we're a little distant from there and there's probably some increases that we're going to be expecting in the short term.
BSC:I think so. That's the way the Fed's pointing in that direction for 2023. Let's go back and try to define inflation a little bit. It's all about different things that have happened throughout the economy. We had a supply chain disruption through the pandemic and now also with the war in Ukraine. We also have economic factors of energy and food prices increasing dramatically, because of a lot of different rules and regulations that are coming out of different industries.

Ryan, who gave, the economist that gave the speech to the is EisnerAmper group a few months back really gave a good definition of inflation. He said, "we're at 8.5%." He said, "the food and energy costs account for two and a half percent of that." He said, "that's the vast majority simply, because of the issues with Ukraine, but also with government regulations." Energy costs are going up, food going off. He wanted to try to back that off of inflation to get back to core inflation, which most economists tried to recognize and report. That would be at 6%. You mentioned the Fed would like to have a target of 2%, 2.5 tops.

He also brought out in his report, which I thought was very interesting, that the government spending that has happened over the past two, two and a half years is $6 trillion of what he's considered excess spending. That attributed to 3% inflationary factor. If you back that out, you're really at 3%. What the Fed's trying to control is that 3%, bringing it down to 2%, and that's what they're doing the rate increases for. With that economic, the Fed keeps that kind of economic view maybe the rate increases won't be as much in 2023 as they were in '22.
BSC:But, it's very interesting how all these factors go against one another sometimes. As a business owner that's what you have to pay attention to.
LS:Exactly. All these factors, Bill, are really impacting what we see as market volatility, number one.
LS:The consumer, we're feeling it in our pocket. Our bag of groceries two years ago was less expensive than it is now and it's probably going to be more two years from now. The other things that are influencing, we talked about, you and I talked about, the domestic political situation.
LS:Blue and the red, potentially split House and Congress. How that's going to... The House and the Senate, how that's going to impact potentially if there's going to be a gridlock regarding law making and what's going on in the short term. Also, you talked about geopolitical and we also talk about Ukraine-Russia. Like you said, related to global supply of energy and food production. Like you said, maybe US not as impacted as other countries are, but also remember China coming out of COVID and their recovery back in the economy. These are all things that are influencing the market on a daily basis.
BSC:Absolutely. I guess, the best thing that comes out of it is the consumer confidence in the US is still very strong. We're still spending. As long as the American public is still interested in spending the inflation probably won't get into the check the way we'd like, because the Fed wants to see that decline. They want the demand to drop and that's when they will stop rates.

Supply has been, what I'll say, people are complaining about costs. They're complaining about the energy costs, they're complaining about the food in the supermarkets, but they're still out there buying. All these factors come into play, as you mentioned with the split House. I think, if the government controls their spending that will help immensely in the overall inflation.

The other big issue is the energy. There's government regulations that only want certain types of energy that affects us. The most strong economies are the ones that are energy sufficient and also food sufficient. US basically has both, but we have to try to make that work amongst everybody with the political risk that it's...
BSC:...going on presently.
LS:Bill, with that said, what we want to focus on today is really how does this impact the business.
LS:And the business owner. Now, we know looking in the rear view mirror not too long ago a lot of our clients, depending on what industry they were in, they suffered potential loss. Whether it was revenue, or employees, or potentially going bankrupt.
LS:How do we based on where we are right now, and all the things we know, and all the factors we talked about, how do we prepare our clients, our business owners out there for dealing with what's happening right now, number one? Like you said, costs are increasing. We talked about the structural labor shortage. What should the business owner's mind be thinking about right now to stay on track and also to think about what do we need to do to surge into the future?
BSC:Hey, as a former business owner before I merged in with EisnerAmper everything that I always taught our clients and practice ourselves was strategic planning. You need to go about working on your business, not in your business. We all get caught up with the day-to-day. It's very hard to get away from that to really do the strategic plan. We recommend that you go offsite with whoever your management team is, maybe outside consultants, really try to come up with your goals. They're both short term goals for operations, a one year budget, versus long-term goals. When do I plan to exit out of the company? What's my three and five-year plan budgets?

There's so many things that affect in the economy. Business owners have to always be paying attention to it. The supply disruption from the pandemic and now the war in Ukraine, definitely, could affect an awful lot of businesses. Is that an issue? Do you have enough inventory? Is that going to affect your sales?

On the other hand, the labor shortage, as we talked about, there's just not enough people in America to hire anymore. That's created a lot of issues. Sometimes cash flow issues for the company owner, because they have to pay larger benefits and more payroll to maintain good employees. But, also the cost to try to get the good talent. You have to try to integrate technology to try to make everyone live in a much more efficient world because this shortage according to the economic reports doesn't seem to be going away. There's a birth shortage from prior generations and that's probably going to stay around for a little while. There's many things that the business owner can do and I know you get involved with a lot of that. What would be your recommendations for hiring or keeping good employees from a...?
LS:It's a good point, because what we see is...
BSC:...benefit standpoint?
LS:...with this the great resignation, Bill. We've seen... Yeah. I think I read a statistic that says there's 11.5 Million jobs that are available now, but that doesn't mean people are going back to work. Okay. Like you said, from the business owner standpoint they're demanding more money, so it's harder to get the talent in, if you will. Then what are we doing to attract, retain, reward,
LS:...Those employees. From the business owner standpoint there are some things we want to take a look at that can help them do this. Executive carve outs, things like a deferred compensation plan to reward those executives. The C-suite people that they want. Those people who are really the ones who are generating the revenue within the company. You could take a look at defined benefit plans, golden handcuffs, any of these things that can help the employee stay excited about where they are, and stay incentivized, and motivated. As you know, also, with this great resignation we also see, and you and I see this with our clients depending on what industry they're in, there's a lot of transition.
BSC:Of course.
LS:They're moving from this place, to that place, to this place, because they're getting a little more income. What we're trying to do from a business owner's standpoint is keep them where they are, put some glue in the seats.
LS:Something the business owner can also do aside from defined benefit there's an iteration called the cash balance plan that allows... It's really a great benefit to the owner himself to help accelerate his retirement bucket, but also a huge tax advantage for him. It's a way to put away money that's a little more complex strategy that's involved, but allows them to reward those, but also rewarding themselves. That's the key is depending on what the runway is for that particular owner. We're going to get to this next as far as preparing for the exit strategy. How quick is that? How far away is that exit, number one? Can we do something to make sure that he's maximizing his retirement efforts along the way, so at the end of the day when he's basically what we call financially ready and mentally ready will he be able to have enough money and capital there to move to the next thing? What should we be thinking about from the business owner's standpoint in order to prep oneself for that exit? What should we be doing? What should we be advising clients and business owners to think about right now?
BSC:You said something very important. Business owners have to think about their independence from their company. The company normally is their main revenue driver. Ultimately, if they're going to succeed it to a second generation or they're going to sell it they have to make sure that the company's in the right position in order to do so.

Let's back up for a second. I think, business owners on a current basis need to come up in their strategic plans to talk about the goals and make sure that everybody's on the same page. You got to make sure you have the right metrics. Everybody is rowing in the same position, as let's say. You don't want conflicts going back and forth where it's counterproductive. You have to set up very good internal controls. That's number one and always one of the best things from a business perspective.

Number two, margins. In these bad economic times we have to really start to pay attention to our margins. If there's supply chain issues how quickly do we get it? Does it affect the overall production line? Or, better yet, how can we increase our margins through more efficiencies with technology? That's that's where everybody seems to be going presently. Or how do I go about do I increase prices? You know what I mean? There's four ways to make money in any general business. Three of them are all about revenue and the fourth one's about cutting cost. I either increase my price, I come up with better margins, I think innovatively and come up with new product lines, new services, and the last is the cut cost.

We were just talking about increasing costs to maintain and keep the employee benefits and also the employees. I think that's an excellent idea simply, because if you lose your employees the amount of costs it takes to replenish that is it more costly? If I already have increased costs to maintain my labor force I need to really go out and try to say how do I increase my revenue stream? From business sale succession planning you always have to think about the bottom line. Most businesses are sold on based upon EBITDA. That's all about the earnings. Does it increase? Is it going on a regular basis? Is there a value add down the road if someone's going to come in and buy your company or if the second generation can take it out? Is there enough cash flow to make that happen? To where you get a hefty buyout, and they still make some money, and see exponential growth in their realm.

There's so many different parameters that you have to look at, but the most important thing is you got to pay attention every single day. Understand what your risks are and start try to address them on a regular basis just as you come to work every day and take care of your actual in business operations.
LS:One of the key things you said, Bill, I just want to reemphasize is that even if we're not mentally prepared about having an exit it's something we should be thinking about even if it's 10 years from now.
LS:Okay. You talked about, we talked about, getting financial statements together, quarterly earnings, all these things to make sure that everything is in place, because at some point in time there's going to be a suitor out there who's looking at this business as we're trying to perceive what the value is. That's where we look for third parties, where we start to get appraisals and things like that to find out where our value is.
BSC:A hundred percent correct.
LS:The blocking and tackling is where it all starts to make sure we're putting all that foundation in place to prepare for that exit.
BSC:That has to be on a regular basis from the very beginning. Starts out with an annual budget, starts out with annual tax planning. How do I reap the most money coming into my business? How do I come up with our strategic plans three, five years, 10 years, as you've mentioned, for a business succession. Other rules from a succession standpoint you definitely want to start doing audited financial statements at least three years prior to when you want to even entertain selling. You also have to look at the economic times. A year or two ago, I do an awful lot of franchise businesses and the multiples to buy franchise companies was extraordinary. Higher than it ever was in the history of franchising. Today, that is dropped like a lead balloon. The financing costs are more expensive. These are not the best economic times right now to sell your business. You have to plan for that.

If you're ready, getting close to retirement, 2023 might not be the best year. We got to hook that you plan for down the road. Cash flow's always king. If the business owner concentrates on the cash flow, that could be simple things. We bypass some of the mundane things, but right now collections are going to be very important. If I have accounts receivable out there I'd better be collecting my money all the time. You don't put that as a secondary priority. That needs to be a main priority, because that's money you earned. You got to make sure that you collect it, so that it's in your cash accounts and not in somebody else's where you're waiting for the money to come. Those sort of things only add stability to the company, but also definitely gives you a great driver for selling the business at a later date. Just good controls.
LS:Okay. Something you and I discussed also is the fact that the business owner, that his decisions should not be made in a silo just on the business. We talked about the fact that there's planning that needs to be done, because the business side and the family side, especially, for a business owner, they intersect.
LS:You can't plan with one without thinking about the other. Let's just touch on that briefly.
BSC:Every time... I used to always try to get our clients to have tax planning meetings once a year, right at the end of the year. They always wanted to come to that meeting, because they know that we could save their money on taxes, even if it was just a deferral. Whether it's deferring income, prepaying expenses, retirement programs, bonuses, whatever it might be for them to defer out that tax bill. Also, at the end of those meetings I would always bring up, "Okay, now you just did all this wonderful planning." We wanted to go through their annual budgets. What was going to be the budget for the next year? Make sure to discuss margins. All the things that we were talking about earlier.

I would bring up as the last agenda point, "Now, what have you done for you personally? Have you planned for your family life and your personal life the way you just did for your business?" Most, lots of times I get the blanks stare. Then I sit back and say, "Okay, let's go with the real simple things. Do you have a will?" They say, "No." I said, "Well, you got a shareholder's agreement, you got a partnership agreement. Why don't you have a will? Take care of your family. Is your business more important than your family?" Ultimately, the answer is no. All of a sudden, now, all of a sudden they're going to get involved in the personal financial planning and that's where EA wealth management can come in and help immensely with all our plights.
LS:Well, that's so thing like the shoemaker's shoes, Bill. Right? They're so focused on their business,
BSC:That's right.
LS:...which is that's usually their largest asset and they're not focused on protecting the family...
BSC:The risk protection.
LS:...and the risk that can be with that.
BSC:Not only that, proper investing. I can't tell you how many people have money sitting in the bank account earning virtually no interest. Now inflation, one nice thing about inflation is interest rates are skyrocketing. In a regular bank account, you might be earning a half a 1%. You go into a money market account with an investment account we might be able to get you around 4.5%. Those kind of things are huge. Just the basics going, reviewing the investments, and reviewing the insurance policies, reviewing their overall goals of their plan. Who's going to get what upon death? Are there any disabilities in the family that you need to create up separate trust for? There's so many things to still talk about at that personal level, just as much as the company level. They really have to go on parallel and at one time start to intersect, because you need to eventually, none of us can father time, we need to remove ourselves from the business, and then hopefully we're still around to take good care of our families.
BSC:We talked about the exit strategies and other things that you should do the three year audited financial statements are always a very necessary component, but you believe we start to have to pre-plan. You need to understand the value of your company. You should be running those KPIs now and also trying to understand what your overall cash flow is, what the multiples are currently, what you could sell for. You need to get a good qualities of earnings report to make sure that the people really understand internally what the company's valued for and how you can make sure that it grows exponentially into the future. Besides the good internal controls getting outsiders to help you value the company is very imperative, so that when you go to market you have the right price to ask for and that the company might have the ability in order to grow exponentially. Which is what most buyers always want. They want that large EBITDA amount now and hopefully they can grow that.
LS:We talked about, Bill, you don't talk... We mentioned the fact that we're carving out something for executives, but I think what the business owner cannot lose sight of, which is really integral, because we see it across multiple industries. You also have your rank and file.
BSC:Of course.
LS:What are we doing to keep them? Because they could also be transitioning out if they're not happy with what they're getting, so what can the business owner do? Well, we could make sure we have a 401K plan that is rich, that probably has some kind of safe harbor match or some type of contribution, so the employee is incentivized. We talked about with the SECURE Act there's going to be what's called automatic enrollment right off the bat, so the employee's going to be in there, but you still want the encouragement for the employee to stay in there and have them plan for their own futures.
LS:The other things that the next iteration for the business owner if he wants to even make it more attractive, is putting together some kind of profit share plan. Like we talked about earlier, to find benefit plan.
LS:These things as an aggregate are hopefully making the employee feel more engaged and more cared for, quite frankly, by the owner.
BSC:Which the culture of the company.
BSC:Most business owners will understand that if they keep good employees the company will grow. When you lose employees the company normally flounders.
LS:As we n-
BSC:It's very important to build up that culture and dollars and cents through benefits as well as payroll bumps. They help. They help immensely.
LS:The employees, Bill, they're smart enough to also feel culture, as you say, it starts from the top...
BSC:It sure does.
LS:... and it trickles down.
BSC:Coming from the top.
LS:They're going to feel it.
BSC:Right. I agree.

As far as, part of the overall selling of the company also comes down with tax plan. We do tax planning every single year for our clients. The smart ones really take to it and have our systems down to minimize the tax. Well, when you're going the sell your company you also have to really zero in. Make sure that the teamwork approach, everyone's on the same page. You have an attorney writing up agreements, they sure better be talking to us about making sure that it has the right tax treatments. Most good law firms will do so, but our clients have to understand that there's different ways of selling the company, whether it's an asset sale or a stock sale and a difference in taxation between ordinary income and capital gains is huge.

We really have to come up with the right parameters to make sure that they have the proper tax savings. At that point in time, they have to build that into their overall cash flow for their independence, so when they sell they always have to reduce their amount by whatever they have to pay the tax man. Which is very important in the overall mental state of the business owner. They need to know what is going to end up into their pocket, so tax planning is always key in our business and to every business owner.
LS:Bill, just really wanted to sincerely thank you for sitting with me here today, and for your insights, and for your input, and for your experience. I wanted to also thank all the attendees today for joining.
BSC:Thank you, Larry. It was a pleasure.
LS:Thank you.

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William St. Clair, Partner in the Private Client Services Group, and founded and oversees the Franchise Services Group at Eisner Advisory Group.

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