Consumer Demand, Investment Pickup Will Trump Market Turbulence
ATLANTA–With China’s economy stalled and the European economy limping, GDP growth in coming quarters is predicated on healthy domestic consumer demand and the return of investment spending despite recent stock market turmoil, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.
Dhawan made the assertions in his quarterly “Forecast of the Nation,” released today (August 27), against the backdrop of China’s devaluation of the yuan over two consecutive days in mid-August – a move the forecaster said “rattled stock markets here and in Europe,” and “is formal proof China’s economy needs a jump-start.” Although initial reactions were negative, he characterizes the devaluation as “positive news for the economy overall” that will boost domestic profit margins on imported goods.
Between low gas prices and wealth gains from reflated home prices and stock portfolios, post-recession consumers are in the mood to spend, albeit judiciously, on utility items. For the first seven months of the year, vehicle sales averaged 17.0 million units – up 4.5% over the previous year’s strong sales numbers. Light trucks including sports utility vehicles drove the increase, rising by 10.7% over the previous year, thanks to automaker discounts and lower prices at the pump. By contrast, consumers hit the brakes when it came to passenger car purchases, which declined 1.9%.
As for oil, Dhawan anticipates prices will stay below $60/barrel until late 2016 due to a drop in global demand and an increase in drilling efficiency by U.S. producers. “People can safely expect low gas prices to continue for the next year.”
But when will the Federal Reserve determine that the economy is strong enough to hike interest rates and by how much? “The expected rebound in investment spending (forecast to rise 6.2% in the second half of 2015), will be strong enough for the Fed to start normalizing interest rates,” Dhawan said. “The issue is whether it will do so at the September or December meeting.” At present, remarks by key officials strongly telegraph a September move provided the ongoing market correction doesn’t deepen further.
Highlights from the Economic Forecasting Center’s National Report
- Following a stumble in the first quarter, real GDP grew at a strong 2.3% in the second quarter of 2015. Growth of 2.2% is expected for the second half, for an overall rate of 2.2% for 2015. It will expand at a better rate of 2.5% in 2016 and 2017.
- Business investment will grow by 3.0% in 2015, rebound to 5.4% in 2016 and 5.2% in 2017. Expect jobs to grow by a monthly rate of 219,000 in 2015, 226,000 in 2016 and 214,000 in 2017.
- Housing starts will average 1.105 million units in 2015, rise to 1.202 in 2016 and 1.275 in 2017. Expect auto sales of 17.0 million units in 2015, 16.5 in 2016 and 16.4 in 2017.
- The 10-year bond rate will rise to 2.7% in 2015 and should rise to 3.3% before the end of 2017.
Domestic Factors Reenergize State Growth
In his “Forecast of Georgia and Atlanta,” released August 27, Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business reported that the sharp deceleration seen in Georgia’s employment growth from 3.9% in the second half of 2014 to 1.7% in the first half of 2015 will reverse in the second half of the year. “As global economic health stabilizes, consumers demonstrate a greater propensity to spend and corporate spending resumes, Peach State job growth will accelerate to 2.6% for the 2015 calendar year,” Dhawan said. Small business hiring, national demand for carpet and auto parts manufactured in Dalton and Gainesville, and economic activity at the Port of Savannah also will add to the growth.
The Georgia Ports Authority announced it moved a record number of shipping containers in the most recent fiscal year. The Port of Savannah experienced a 17.0% increase in 20-foot equivalent container units, and the authority as a whole experienced a 7.8% increase in total tonnage. Construction is expected to begin this year on an inland port in Murray County that will serve as a direct link from the Port of Savannah to North Georgia, Alabama, Tennessee and parts of Kentucky. According to Dhawan, “that’s good news for manufacturers in North Georgia who will likely see positive economic growth and benefit from national housing and auto demand.”
The corporate sector is faring well in Georgia and Atlanta. Statewide, the sector posted a 7.2% gain in the second quarter, “pointing to momentum moving forward,” the forecaster said. Furthermore, the move of several headquarters to Atlanta continues to result in professional and business services hiring. “Although this sector is enduring weaker global growth, domestic consumption is taking up any shortfalls.”
Housing demand has been boosted by numerous moves of headquarters and offices to Metro Atlanta. In the second quarter of 2015, total housing permits in the area grew by 25.3% over the same period in 2014, driven by a 36.6% growth in multi-family permits.
Dhawan said that millennials, who constituted 23.6% of Metro Atlanta’s population in the 2010 census, are making their influence felt in several regards. “To no one’s surprise, millennials are fueling demand for multi-family housing. They’re also spurring area companies to relocate to downtown and Midtown in order to draw on their high-tech skills.”
Also gaining momentum is Atlanta’s information sector, which added 600 jobs in the first half of the year. “I expect the area’s information sector to continue to expand in coming years as it benefits from a robust fiber optic infrastructure, relatively low cost electricity generation and a reliable power grid,” Dhawan said. Attracting young, technologically savvy talent is one of the reasons that healthcare added almost 3,500 jobs in the first half of 2015. For the full year, this sector will add 8,100 jobs.
Although growth in the metro area’s hospitality and transportation sectors slowed somewhat in the first half of the year, both will benefit from the spillover of domestic demand growth in catalyst sectors (corporate, healthcare, technology and manufacturing) for a combined total of 12,800 jobs in 2015.
Highlights from the Economic Forecasting Center’s Report for Georgia and Atlanta
- Georgia employment will gain 82,900 jobs (23,400 premium jobs) in calendar year 2015, 87,500 jobs (21,400 premium) in 2016 and 94,100 (22,900 premium) in 2017.
- Nominal personal income will increase 4.6% in 2015, 5.1% in 2016 and 5.8% in 2017.
- Atlanta will add 62,400 jobs (16,200 premium jobs) in calendar year 2015, 63,300 jobs (14,800 premium) in 2016 and 65,500 jobs (15,600 premium) in 2017.
- Atlanta’s housing permits increased 25.3% over the second quarter of 2015 compared to the same period in 2014. Permitting activity in 2015 will increase 8.9%. Permit activity will grow 11.2% in 2016 and will grow 6.9% in 2017.
The answer to the question asked in the title is, “It all depends!” There are all sorts of studies, surveys and the like suggesting that as more and more “baby-boomers” reach retirement age, the market will be flooded with companies for sale. The consensus is that with these privately-held company owners reaching and nearing retirement age, the time to sell is now. In one survey, 57 percent of business owners said that their age was the motivating factor for exiting their business. In another one, 75 percent of owners with revenues between $1 million and $150 million stated that they looked to sell within the next three years. Reading all of this information, one gets the feeling that over the next few years almost every privately-held business will be on the market.
While there are always going to be those who feel that Armageddon is coming, or that all of these companies are going to be on the market on the day that baby-boomer owners hit 65, there are some compelling reasons to sell your business now – and some reasons that may compel you to hold off. One good reason for any owner to sell “now” is that it just may be time to “smell the roses,” as they say. After running the business for so many years, “burn-out” is a very valid reason for selling. Many business owners may have, without actually realizing it, let their business slide a bit. You lose a customer or client here and there and don’t make the effort to replace them. Or, you don’t make the effort to check back with the supplier who has promised to give you a better price on an important product or service. It’s too easy to stick with the one you have been dealing with for years, even though you know the price is probably too high.
On the flip side, it is also easy to convince yourself that business is down a bit this year, maybe due to the current economy or recent legislation, likely reducing the value of the company. Maybe waiting until things pick up a bit and values increase would be a good idea. Thirty-five percent of business owners, in one survey, said they were going to hold off selling because they felt their business would continue to grow and therefore, hopefully, also increase in value. Unfortunately, no one can predict the future. New competitors may enter your market. Foreign competition may move in. You may not have the energy or that “fire-in-the-belly” you once had, so the business may slide even further.
You could also point your finger to the tightening of credit and ask, “How is a buyer going to finance the business?” Despite very low interest rates, borrowing money is now more difficult.
There is an old saying that the time to plan your exit strategy is the day you start running the business. Business owners can’t outgrow interest rates, legislative changes or aging. The time to sell is when you are ready to sell. The mere fact that you have read this far may be a sign that now is the time to sell. To learn more about current market trends, what your business might sell for, and what your next step might be, call a professional intermediary.
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Third in a series on Business Brokering
Buyer and seller strike a deal, but a thorough due diligence and either seal or sink that deal.
Georgia Association of Business Brokers Vice President Mike Ramatowski moderated a panel discussion at the July meeting on getting buyers and sellers through due diligence and to the closing table. Panelists were GABB Board Member Loren Marc Schmerler, CPC, APC, President and Founder of Bottom Line Management, Inc.; Kim Romaner, President of Transworld Business Advisors, who has 30 years of corporate and entrepreneurial experience in sales, marketing, operations and technology; and attorney Sarah Wheeler of Moore & Reese.
1. Find out if your clients REALLY want to buy or sell the business.
Have a heart-to-heart talk with your clients before putting the business up for sale, or making an offer on a business, to make sure the buyer and seller are really truly ready to do this. Cold feet will sink a deal, says Wheeler, who represents buyers, sellers or acts as a transactional attorney.
2. Make sure each side has realistic expectations.
Sellers must understand that they will be expected to sign a no-complete contract when they sell. Buyers must understand that if they need financing, they shouldn’t expect to get financing from seller with zero percent interest.
3. Clarify the terms of a Letter of Intent.
A letter of intent, a.k.a. LOI, is typically the beginning of the buying process and signifies a meeting of the mind. Both parties should understand whether the LOI is binding or not, how earnest money will be handled, etc.
4. Take the skeletons out of the closet.
If something is wrong with the business, if there is a liability, it’s a bad idea to hide that fact from a potential buyer. If it comes up in comes up in due diligence, Wheeler notes, the buyer will assume the seller was trying to hide it, and that makes it a lot harder to deal with. Schmerler said he had a sale imperiled because a prospective buyer discovered that a major client was going to discontinue business.
5. Use a GABB lender.GABB-affiliated lenders have experience with business sales, and understand the process. Other GABB affiliates are familiar with the ins and outs of deal making and will make the process smoother.
6. Get franchisors, landlords on board.
If you’re selling a business with a lease, don’t leave the landlord out of the process. Ditto with a franchisor if a franchise is involved. These and other interested parties can make or break a deal.
7. Complete the lender checklist. Lenders typically send out checklists of items they need before a sale can be completed. Sellers should read them and get that information together as soon as possible. Try to educate your client that the money drives the ship, and the closing will happen when the lender is satisfied.
8. Leave enough time for proper due diligence.
Due diligence takes time. Count on at least ten days for a main street transaction, Romaner said, longer for bigger deals.
9. Clarify expectations after the sale.
Sellers often agree to stay on during the transition, but Schmerler said usually the buyer doesn’t want the seller there after the second or third week. The buyer wants employees to view him or her as the new owner.
The July 28 panel was the third in a 3-part series of discussions designed to help GABB members improve their businesses. In May, social media expert David Camp discussed effective ways to use quality content and technology to prospect for new clients. Hear his comments on the GABB blog. The June panel featured three experienced brokers with differing approaches to working with buyers and sellers. Read about the panel and hear a recording at the GABB blog.
GABB meetings begin with guest and member introductions. After introductions, we have a presentation by either a panel or a speaker and then some time for questions. After the presentation we’ll have a few items of association business and then adjourn the meeting at around noon.
There is no cost to attend and there are two parking decks available with free parking adjacent to the facility. For more information about the GABB, contact GABB President Greg DeFoor at firstname.lastname@example.orgRead More