4 Planning Considerations for a Turbulent Market

By Tyler Webb, Financial Advisor with The Willis Group at UBS Financial Services Inc.

With inflation high, interest rates rising, and growth falling, the current economic backdrop is challenging. The demand from homebuilders is expected to decline as the pace of single-family housing starts and permits continues to moderate. Simultaneously, business owners are highly concerned about rising materials costs and wage inflation.

We’re entering “A Year of Inflections”—for inflation, rates, and growth. Navigating these inflections will be key to business success in the year ahead.

So, how can business owners and contractors plan in this unsettled market? Following are  some of the biggest challenges facing business owners in the year ahead, as indicated in UBS’s Entrepreneur Compass, and observations in working with contractors and other business owners in the current economy.

1.    Addressing increased volatility and uncertainty

In times of increased volatility, uncertainty is often higher for consumers and business owners. With many homeowners and buyers looking for greater clarity on the outlook for economic growth, interest rates, inflation and what the Fed will do next, volatility can create risks and opportunities. Our UBS Chief Investment Office predicts that economic volatility will continue well into 2023.

Still, while turbulence is likely ahead, history has shown that at some point, the economy likely will pick up. For those that are able, now may be a good time to invest in their businesses to gain a greater market share with the longer term in mind.

For those who are able to look through short-term noise, the challenges we saw in 2022 should give way to longer-term opportunities in the years ahead. Instead, consider staying invested but also be defensive with a preference toward value, diversification, and private markets.

• Protect existing cash flows, create new ones, and reduce costs.
• Focus on building personal and business resilience. Strengthen relationships with your employees and foster leadership among your management team.
• Communicate effectively in the current economic environment. Be transparent, frequent and clear in your communications so that employees understand the challenges, priorities and where they stand.

Also consider your own personal financial needs, as a business owner and/or investor. What are you and your family’s needs when it comes to:

Immediate cash flow needs—Looking at immediate cash flow needs (from major purchases, general living and entertainment, taxes, utilities) puts a focus on capital preservation. One strategy is to ensure that expenses for at least 12-18 months are held in cash and cash like instruments to help minimize volatility risk. Then a portfolio of high-quality bonds could be used for the next 1-3 year term; ask your financial advisor for more information.

Future needs—Investable assets with a longer time horizon designed to fund future retirement goals, healthcare and long-term care expenses you and your family will need. Funds in this aspect of your strategy portfolio can be invested with the aim of long-term wealth growth. By assessing and planning for your “future needs,” and creating an investment allocation that aligns with those goals, you can help increase the probability of meeting your retirement needs.

Needs and desires to give back—your desire and ability to leave a bequest for family, organizations or causes, in the future. What people and things are most important to you? And how do you hope to protect their needs and ensure your legacy in the future?

2.     Addressing supply chain instability

Problems with the supply chain is another major challenge businesses are facing and is especially critical in contracting given the need for materials, amid increasing costs and delays in transport. Supply chains continue to be under stress. 110 days is the time it typically takes goods to go from exporter to importer by sea. In 2019, the time was about half that, at 45-60 days, according to Flexport Ocean Timeliness Indicator.

If you have not already, make sure you have a comprehensive knowledge of your supply chain, to strategically select and collaborate with suppliers. Determine contingency plans and identify less expensive alternatives or buffers to manage risks, where possible.

3.     Shifting consumer preferences

Many customers are seeking more environmentally-friendly and/or digitized solutions. From sustainable consumption (including greywater systems, Wi-Fi enabled smart locks and security systems, connected and learning thermostats) to smart appliances (including showers and toilets), passive design, green roofs and net-zero buildings, business and consumer trends are quickly emerging and evolving. Understanding these and anticipating future trends is becoming increasingly more important for contractors in all industries.

Business owners need to stay on top of trends. Dig in to your business to identify what is working/what is not, as well as to detect emerging customer preferences and opportunities. In a changing economy, it’s important to be knowledgeable, agile, adaptable. Read industry publications, get involved with organizations, and go to conferences to spot trends early and be more responsive to emerging consumer preferences. Consider the lead-time required to provide new offerings.

4.     Thinking about your “next”

As a business owner, you are likely planning for and dealing with issues like safety, legal requirements, potential employee challenges on a daily basis. A crisis can negatively impact employee morale, affect operations, and test business owners and managers.

Additionally, for many attracting, maintaining and motivating workers is another major challenge. From wage inflation to the new work-from-home paradigm, the competition for skilled labor is rising. Businesses are also recognizing the need to build more diverse teams and develop environmental, social, and governance (ESG) focused practices.

Whether you are a business owner, plan to be one, or plan to continue working for someone, it is important to consider your goals for the future on a longer, several-year time horizon, in addition to the near term and next year.

When it comes to the longer-term, you may be looking to expand support, or considering business succession. Or, you may be asking, is now a good time to sell, or should I try to wait it out?

It’s never too early to plan. If you are looking to pass the business on to heirs in the future, start having conversations to assess your children’s interest in continuing the business. Nearly half of business owners say they hope to pass their business on to family, but about 41% of them say they haven’t discussed business transition with heirs, according to this Investor Watch report. And while 67% of business owners say they think their heirs will prefer the business over assets, in actuality only 52% of heirs report they prefer the business.

If you are considering a strategic business exit, begin building an advisory team that will work together to design a plan and execute it. This team should include, but is not limited to, investment bankers, an estate planning attorney, CPA, financial advisor, lender, and commercial realtor. Preparing for a successful transfer or exit requires planning to help maximize the value of your business and maximize the net proceeds of the sale for the people and causes you care about.

In some cases, business owners are able to sell their businesses sooner than expected. In others, they decide to postpone the sale and focus on making changes to increase the value of the organization.

Every individual, family and business is unique, and situations can also change rapidly, as we have seen over the past few years, which is why it is best to plan early, talk with a financial advisor, and review your investments and options annually.

Tyler Webb is a Financial Advisor with The Willis Group at UBS in San Diego who regularly works with business owners in the contracting and construction industries with experience stemming from his family’s businesses in residential construction and aerospace industries. He can be reached at [email protected]

The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. Investing involves risks and there is always the potential of losing money when you invest.