One year ago, I wrote in these pages that I expected companies to make significant capital investments to grow their companies. I wrote that because companies had strong balance sheets and ample liquidity caused by good economics and government stimulus. I thought business owners and their CFOs would want to generate return after a mostly cautious 18 months following the pandemic.
It doesn’t always happen, but my intuition turned out to be right. Our clients made large investments in robotics, square footage, software, acquisitions, equipment, and labor to be more efficient and more profitable. It’s rewarding to help clients grow, but as we’ve turned the calendar, that robust investment activity has slowed. Why? High interest rates? Less liquidity in the system? Spector of a recession? Maybe. But I think businesses have slowed down for a very healthy reason.
Good businesses focus on execution and de-risking after a major investment and focus means you don’t pick up a new shiny object until the last shiny object is accounted for and securely in your pocket. If you’ve made a big investment or otherwise had strong growth, think about the following:
- Is gross margin in line with expectations? Is it eroding because of increased input costs or lack of proper oversight? Have you considered gross margin compression in your financial models?
- Is your management team capable of handling increased responsibility? If your management team is key to the success of the investment and company, are they a party to beneficial employment contracts and compensation plans?
- Your company just got bigger and likely more valuable. How does this affect your buy-sell agreements? Does your estate plan reflect the larger company?
- What can you do to make sure your new customers stay customers for a long time?
Growth and acquisitions are exciting. But the real success of any investment comes from the attention to detail and disciplined managerial oversight after the deal closes. It shouldn’t surprise us that flashy deal volume looks to have slowed. Good managers are busy making sure investors are getting the proper return on these big outlays.
If your company is still on the lookout for outsized growth and investment in 2023, you might reverse engineer some of the above themes to make your investment more profitable and your company more valuable:
- Ensure your management team is on the same page. Do you have the right people to execute?
- Keep your advisors aware of your plans. Legal, tax and banking concerns can often be improved on the front end.
- Focus on pro forma gross margins. Increased labor and materials costs are putting pressure on profits and historical margins may not be in line with the current run rate.
- Sometimes deals come together quickly. Your bank should be aware of your investment strike zone and ready to help. If your bank isn’t on board with your plans, it’s better to know that now rather than a week before closing. A few things to consider:
- Does your bank make decisions locally? If so, have you met the decision makers?
- Does your bank have the liquidity to make new loans? As mentioned above, liquidity has run out of the financial system due to the Federal Reserve’s monetary policy. Good banks have plenty of liquidity to loan to your company.
- Is your bank well capitalized? If there is a recession, you want your bank to have the staying power necessary to help your company.
- Does your bank have the scale you need to make large investments? Ideally, you want a bank that is big enough to make large loans, but not so big that you can’t understand the decision process or meet with decision makers.
At Cedar Rapids Bank & Trust, we take great pleasure in discussing business and assisting our clients. As a company, we value the mutually beneficial relationship that comes with learning from and imparting knowledge to our clients. That’s what makes this job meaningful and fun.
John Hall is the Chief Lending Officer at Cedar Rapids Bank & Trust. His direct line is (319) 743-7068.