February 27, 2020
Joseph J. Lebel III
The economic recovery that began in June 2009, following the Great Recession, has now lasted for 128 months, making it far and away the longest expansion in US history! The markets we serve at OceanFirst Bank, spanning metropolitan New York, New Jersey and Philadelphia, have enjoyed robust growth during this period, marked by declining unemployment and rising GDP.
Despite the current upbeat economic tone, concerns have been raised that such a mature expansion can’t be sustained for much longer. Yet, many business owners remain optimistic, or at least cautiously so, and are considering financing to support the continued growth and success of their companies. Regardless of the growth expectations for any individual company, I always advise business owners and managers to make sure that several foundational elements are in place when planning – and securing capital – for the future.
- Formal growth strategy. Most business owners and managers understand the need for a formal business plan, but some (especially at smaller or family-owned companies) may not be aware of all the elements that should go into their plan. The most important question to ask: What’s your definition for success over the next three-to-five years? Specifically, what rate of return on invested capital do you expect to generate? How do you expect to do it, and what happens if your target market changes? The answers should be based on a clear-eyed assessment of factors such as the marketplace, customer demand, opportunities and known and emerging risks. It’s also important to consider how the business might be affected by a structural change, such as transferring ownership to the next generation or bringing in an outside source of equity.
- Worst-case scenarios. Given the longevity of the current economic expansion, business owners need to consider how to adjust if the cycle were to turn sideways or negative. What are your alternatives if your growth strategy proves not to be viable, or market/economic conditions weaken? Even if the economy stays healthy, it’s essential to anticipate potential threats to the business. For example, could the company thrive if faced with a technologically advanced competitor, such as Amazon?
- Talent and technology. Since no business is static, it’s likely that the capabilities needed to run the company today may not be sufficient tomorrow. Owners and managers should consider how they will acquire the talent and technology to compete in a changing marketplace. What kinds of human skills will be needed over the next several years, and can they be developed in the existing staff or will you need to hire new people? What technologies will be required to stay ahead in a world of digital disruption, and are those technologies best developed in-house or outsourced? And, can your capital plans accommodate the required investments in people and technology?
- Trusted relationships. Every business depends on an ecosystem of relationships: accountants, attorneys, bankers, financial advisors, insurance providers, and sometimes consultants. At OceanFirst, when we are considering entering into a relationship with a company, we always want to understand the depth and nature of the relationship companies and their owners have with their accountants and lawyers, if insurance coverage is suitable for the long-term needs of the business, etc. It’s important that these entities be true “partners,” with a team that is deeply familiar with your business and committed to its success. Are those partners willing to be honest with you when discussing both the strengths and weaknesses of your business? Do you have to continually educate new relationship officers, because of high staff turnover at a service provider? Do these partners have sufficient resources and capabilities that your company won’t outgrow them over time? How often do these partners visit your premises to stay current on the changing aspects of your business?
- Financial flexibility. Finally, the company should have a rational capital structure and financing that can accommodate changes (positive or negative) in the business. In the current interest rate environment, it is relatively inexpensive for a business to finance a project, expansion or acquisition, but there’s no substitute for having a well thought-out plan for how that capital will be used to facilitate your strategic goals. Also – and this goes to my point about the value of relationships – a company should expect its bankers to create financing solutions that are customized to the needs of the business, which sometimes may be different than what the clients thought they needed. Believe it or not, sometimes companies need more money than they ask for, or require a creative way to finance a unique need.
In New Jersey alone, there are approximately 865,000 businesses, large and small. Whatever the size of your business, or the industry in which you participate, it’s essential to have a well thought-out strategy; to be able to access the talent, technology and capital needed to grow; and to have trusted relationships with the professionals and partners who can help your business realize its full potential.