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High Performance: Are you ready for the Great Margin Drop?

October 5, 2022 -  By

You’ve heard of the Great Resignation, right? Well, you’re about to hear of the Great Margin Drop. The costs of doing business are rising, and the price increases needed to cover these costs are not sufficient — or not timely enough — to avoid a drop in profit.

Most companies will be unable to avoid the Great Margin Drop. The only questions are: how severe will it be and how long will it take to recover? Both of these questions will be affected by things out of our control, such as the economic state of our local area, region, nation and the world.

photo: peshkov/iStock / Getty Images Plus/Getty Images

photo: peshkov/iStock / Getty Images Plus/Getty Images

Know your numbers

What we can do is become very well-acquainted with our own numbers. This is an ongoing challenge for many business owners. This is the last thing they want to do. I get it. But what is happening today is serious and some companies will not survive. We are not operating in a stable economic environment.

The rule-of-thumb estimating methods, for example, used for decades may not apply today. Business owners need to look at real numbers on a regular basis, understand what they are looking at, and be prepared to act quickly and boldly.

The influx of private equity

Along with the Great Margin Drop is an increase in roll-up activity in our industry. Larger companies are buying (rolling up) smaller companies. Private equity sees our industry as attractive and is investing significantly, buying up small, medium and large companies. All of this makes sense because economies of scale generally result in greater profit margins.

So, there are lots of buyers looking for companies to acquire. The Great Margin Drop will accelerate this trend because many owners will become desperate and seek a buyer, selling their businesses at a discount just to get out. Savvy buyers know this is coming and are licking their chops.

There will be a time to sell or transfer to the next generation, but that time should not be the desperate act of a person running scared. The way to not become desperate and sell short is to understand your numbers and have a plan.

Where to start? Start by taking time each month to review your financials in detail. Ask questions to understand what you’re looking at. You may need your accountant or business advisor to help you through this. Begin to use this knowledge to forecast, plan and make informed decisions.

The Great Margin Drop is coming. Are you ready?

Now go forth.

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