A long-term change in inflation can highly impact business sales as the costs of goods increase and there is added pressure on the profitability of an organisation. To deal with the issue of rising inflation, people considering a business sale need to be aware of the positive and negative impacts and how to deal with them. Whilst running a company, you need to always keep in mind your exit strategy and how you will approach your business sale. When inflation is on the move, you need to properly manage your company’s finances to ensure profitability is maintained (or ideally increased) so it can help you achieve an optimum price at the business sale time.
How is Inflation Measured?
The inflation rate is measured by the Australian Bureau of Statistics (ABS) when they calculate the CPI (consumer price index) by monitoring thousands of household items in 87 categories. “Every quarter, the ABS calculates the price changes of each item from the previous quarter and aggregates them to work out the inflation rate for the entire CPI basket” RBA The most recent CPI was released by the ABS in March 2022, showing, “The Consumer Price Index (CPI) rose 2.1 per cent in the March 2022 quarter and 5.1 per cent annually”. New dwellings (+13.7 per cent) and automotive fuel (+35.1 per cent) were the most significant contributors with the price of goods (+6.6 per cent) rising more strongly than that of services (+3.0 per cent). Watching the CPI and inflation rate can help you prepare for your business sale. Depending on your industry and what products and services you offer, it can be an indicator if you need to take action sooner in the business sale process. Do you think your company is capable of dealing with these increases? If your company is heavily reliant on the items that are rising in price, will you increase your prices? Will you pivot and change? Will you advertise your business sale?
How Can Inflation Negatively Impact Business Sales?
With rising inflation, we have rising costs of goods and services. The major negative impact is if an owner doesn’t manage their expenses well, and it affects the valuation of the business on sale. Whilst many owners may hesitate at increasing prices, if they don’t, they may see their net profit decrease, as the cost of goods will take up more of their expenses. This ultimately may affect the final price of the business sale as it is no longer seen as being as profitable. Understanding how inflation is affecting companies can help owners to ready their shops, retail stores etc for the necessary changes. Fuel has Risen 35.1% and it Affects the Supply Chain The war in Ukraine is said to have pushed up fuel prices to the highest level in 5 years. With prices well over $2.00 a litre in many regions of Australia, the need for companies to increase the cost of products and services is being considered. The number of business sales may start to increase as owners of majorly affected industries such as transportation try to sell and exit before the increase continues and they may be unable to properly manage these changes. Fuel has risen 35.1% in the last quarter. This is a big warning to the transportation industry and companies such as couriers, taxis, petrol stations and freight services. How will they manage these costs, will they pass it on to their clients and consumers? The profitability of a company is based heavily on the EBITA (earnings before interest, taxes, depreciation, and amortization), so when a business sale is being considered financial documents will be reviewed usually over the past 3 years. How will owners manage this turbulent period with increased inflation and pricing? If we take a look at a loaf of bread. Fuel is needed to harvest the wheat, it is needed to transport the wheat to the flour mill, and it may be needed to turn the wheat into flour. This is then transported to a bakery, where the bread is made, and the bread is then transported to the supermarket or retailer. One simple $3 loaf of bread, uses fuel multiple times on its production journey. If fuel rises by 35.1% how is the cost of this simple loaf of bread not going to rise? How is a bakery for salegoing to manage this cost in its expenses. It is easy to see how fuel is heavily embedded in the supply chain of most organisations whether they are small corner stores or a major transport company. When the cost of fuel goes up, so does the need to increase products and services.
The Pressure of Inflation on the Hospitality Industry
The hospitality industry relies heavily on fresh produce and transportation to deliver quality products and services to their clients. Whether it’s making a fresh salad to sending takeaway via uber eats, there are costs involved in every step, and with rising inflation, these costs increase. If someone is currently considering buying an opportunity in this industry, they may want to investigate how rising costs will be covered in the business sale they are looking to purchase. Let’s take a look at the humble iceberg lettuce. It usually retails for around $2, though recent news headlines have highlighted the exorbitant costs consumers and businesses are paying, with costs well above $12 for one single iceberg lettuce. Whilst wet weather has been said to play a part in this increase, it’s important to take a look at the CPI. Recent CPI shows a 6.6% average price increase for vegetables in the last quarter. The fruit has gone up by almost 5% while meat and seafood has gone up by 4.8%. How do cafes, restaurants, takeaways etc absorb these price hikes? The only way is to pass it on to consumers or change the products they are using. KFC received a lot of backlash recently by swapping out lettuce for cabbage. But they were innovative, quick to move and ultimately protected the bottom line and profitability of their business. They got some good publicity from it as well.
How Can Inflation Positively Impact Business Sales?
With change, owners need to innovate. It was one of the key lessons during COVID restrictions and it’s a lesson owners need to continue to learn, especially if they are considering a business sale. When your supply chain is affected by inflation or it becomes more expensive for you to deliver your product or service to your consumer, you need to stop, re-evaluate and make decisions. If you don’t react or make changes, you will ultimately see an impact on the bottom line. Affecting this bottom line can affect the price of your business sale. A positive outcome to increased inflation is that owners learn how to make their business sale more profitable. Evaluating the cost of goods and how they will deliver their services with increased inflation forces owners to come up with alternatives. They could see an increase in profitablity due to these changes. Owners may also decide it is time to sell a business, whether it is affected by inflation or not, preparing a business sale may become more a fore thought. Instead of waiting six or 12 months to see what happens with inflation, interest rates, house prices etc owners may decide now is the time to sell. This creating more opportunities for buyers.