skip to content

Key macroeconomic drivers impacting valuations: What should business owners know?

Article

While inflation and higher interest rates are impacting businesses and consumers, overall the Canadian economy has proved itself to be resilient—experiencing strong growth in 2023.That said, as a business owner in Canada you are likely still facing significant headwinds. Tighter credit conditions and higher borrowing costs are being felt across the economy. Unemployment remains low, but labour demand is weakening, with job openings declining and labour market pressures easing from decreased competition for workers and increased labour supply.

Business owners are contemplating how the rest of the year might look. Is it time to consider selling your business, investing in new opportunities, or mapping out long-term plans?

Business growth in a challenging environment

Inflation in Canada is running above the central bank target rates, resulting in tighter credit conditions and higher borrowing costs, ultimately impacting business investments. However, the Canadian economic outlook remained robust with the strongest growth among G7 countries in the first quarter of 2023. At the time, there was a 3.1% advance in real GDP as well. The near-term strength of the economic forecast is likely to be counteracted by economic deterioration in 2024, as major projects decrease and the prolonged effects of higher interest rates impact capital expenditures.

Results from the second-quarter 2023 Business Outlook Survey and the Business Leaders’ Pulse surveys from April through June 2023 showed that businesses expect weak sales growth ahead. Companies tied to housing and consumer discretionary spending have a more negative outlook. 

Yet many businesses noted that their markers of domestic demand are up slightly compared to a year ago. This shifting attitude is tied to several factors, including:

  • Less uncertainty about the future path of interest rates
  • Decreased concern about a recession
  • Upcoming large capital projects in both the private and public sectors
  • Stabilized and/or improved supply chains
  • Ongoing recovery from the pandemic

Labour force issues continue, but improving

As a business owner, you’re likely very familiar with the challenges in the labour market over the past few years. The good news is, while still facing some issues, the labour demand is weakening. Job openings are down almost 20% from peak levels in Canada, and by 16% in the U.S. With job openings declining and labour market pressures easing due to decreased competition for workers and increased labour supply, business owners should have an easier time filling positions.

Fewer workers are leaving their jobs, which is typically an indicator that confidence in labour markets is waning. Furthermore, wage growth is predicted to moderate from the elevated levels seen throughout the pandemic.

Businesses valuations: Growth or exit?

Valuations in certain sectors may be down, but there are opportunities for businesses that find themselves well capitalized and positioned to grow. So for a business that doesn't have a lot of debt, there are options. With lower valuations there are possibilities for less expensive acquisitions with some sellers accepting more purchaser friendly structures. This is greatly beneficial in the current high-interest environment, especially considering banks are more restrictive around how much money they will lend to borrowers.

Valuations could still hold strong in select industries if the business produces a non-discretionary item that doesn’t expect demand to suffer through a macroeconomic cycle versus a more discretionary luxury item. Owners in certain situations might also benefit by positioning itself for more aggressive growth and take larger market share, growing in areas where others are not able to take on the same risk.

On the reverse, some competitors and other market participants will face additional pressures with lower margins for error as a result of increased debt. The sales for products highly impacted by consumer confidence may have seen declines over the last year with perhaps more to come in 2024. 

The owners that find themselves in difficult positions need to look at other options. Operationally you need to create efficiencies and ensure that you’re managing cash flow appropriately. It’s also paramount that you practice diligence in managing your operations and exercise caution to ensure that you come out on the other side of this complex business environment. In certain situations, you may even contemplate selling your business, and we can help determine whether that is the best choice for you.

Let BDO guide you

Our professionals have the ability to help you think about where to invest, whether organically or inorganically. We can help advise throughout the transaction lifecycle whether you are selling or more focused on the various needs to grow inorganically including market scoping, target contact, confirmatory diligence, and integration. On the organic side, we have the expertise to assist with a growth strategy or analyzing where you can invest to drive the right return. Our team can guide you on both the planning and execution phases.

However, if you find your business is under pressure, our capital advisory team is here to evaluate debt and develop options. Our consulting team can work with you on cost management, modeling exercises, and reviewing your operations to see where you might be missing opportunities.

Making the right move

Whether you’re looking to grow or sell your business, now is the time to start considering the options for the future. As a firm, BDO has a very entrepreneurial approach with the flexibility and adaptability to move very quickly. Across all our service lines, we are able to create tailored options while delivering value quickly, no matter the client situation. Reach out today to start the process.

Contact Us Today

This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our privacy statement for more information on the cookies we use and how to delete or block them.

Accept and close