The Newport Board Group, a CEO Advisory Firm Serving Middle Market Companies, Releases 5 Business Predictions for 2016

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2016 will be a challenging year for middle market companies - Be prepared to turn challenges into opportunities!

Looking ahead, 2016 may turn out to be the most challenging year for middle-market companies since the 2008/2010 recession.

Looking ahead, 2016 may turn out to be the most challenging year for middle-market companies since the 2008/2010 recession.

The U.S. economy has continued to exhibit remarkable resilience despite the many economic and political challenges that threatened to derail it in 2015: the looming presidential elections, threats of global terrorism affecting many countries, slowing growth in China, and rock bottom commodities prices pulling down world economies and stock markets. However, a greater degree of economic, political, regulatory, and capital market volatility is to be expected in the coming year for the U.S. economy and middle-market companies.

Despite the headwinds ahead of us in 2016, the U.S. economy grew at a 1.5 percent GDP growth rate in Q3 of 2015 and is expected to end 2015 at 2.9 percent. Most economists do not expect this growth to continue, with predictions for GDP growth to be slightly to significantly lower for 2016.

In PricewaterhouseCoopers’ most recent Trendsetter survey, U.S. private companies reported that they expect to grow their revenue by an average of 8.7 percent over the next 12 months, with over one-third of private companies expecting double-digit growth. The question is how to achieve these levels of growth in an uncertain economy.

2016 holds a lot of challenges for business growth and expansion, and smart CEOs and investors should position themselves for a highly volatile year.

Here are my five top business predictions for 2016:

1. Expect gradually increasing interest rates and tougher credit for business.

U.S. employers are continuing to hire new workers at a healthy clip, keeping the economy on target to add 2.5 million jobs in 2015. Continuing payroll gains and upward changes will likely remove the final obstacle to the Federal Reserve making its move to increase interest rates. Future moves in the central bank’s tightening campaign will remain dependent on further improvements in the U.S. economy and progress toward reaching the Fed’s targeted level of inflation.

Despite the economic recovery, securing expansion financing remains an ongoing challenge for many small and medium-sized businesses that lack the level of consistent positive cash flow and asset-based security that lenders look for when lending to private companies.

According to a report published by the National Small Business Association, nearly a third of small businesses are without the capital they need. Many businesses don’t even apply for financing because they believe they will be turned down. Expect tighter capital markets for small business in 2016 and higher borrowing costs for those companies that are able to get credit. And look for emerging companies to continue to develop business models that minimize demands on their working capital. Converting costs from fixed to variable, such as employing outsourcing solutions so that they increase only as revenue does, is an example of such a strategy.

KEY TAKEAWAY: Secure your capital needs for 2016 now!

2. Lower oil prices into mid-year followed by gradual increases in the cost of oil.

Oil has slumped to levels last seen in the global financial crisis in 2009 amid a global supply glut. While the prices of benchmarks West Texas Intermediate and Brent currently hover in the $30s, some categories of crude are already pricing in the $20s for a barrel of oil—clearly not a sustainable economic model for oil companies and oil-producing countries. Anticipation of Iran’s return to the global energy market is also suppressing prices.

Expect massive consolidation of smaller U.S.-based oil exploration and production companies, and a decrease in worldwide production to match demand, thereby stabilizing oil prices about mid year. Although low oil prices are great for consumers, they can cause a worldwide recession as countries heavily dependent on oil production edge near loan defaults. Big buyers such as China and the United States will look to lock in low oil prices and drive demand, resulting in gradually increasing prices.

Commodities including iron, aluminum, and other metals are at historically low prices. With production companies closing down mines and production facilities, expect gradual price increases in raw materials as the global oversupply is reduced.

KEY TAKEAWAY: Consider purchasing forward futures on raw materials and energy early in 2016.

3. This will be the year of the mega-merger.

Excess cash and relatively low stock prices of non-technology companies will drive mega-mergers similar to the one recently proposed by DuPont and Dow Chemical. That merger may be a harbinger of things to come, inasmuch as the parties intend to combine and then break up the new company into two or more newly reconfigured businesses.

Auto mergers may finally happen as margins continue to be a problem in an industry ripe for consolidation of production and research. The prospect of “smart” cars loaded with technology may produce some unexpected mergers between technology companies and automakers and suppliers.

Consumer products and drug company mergers are already in process, and this will accelerate in 2016. At the same time, big companies with faltering prospects will continue to face pressure from activist investors, who last year as a group made a run at some 200 companies and replaced a number of prominent CEOs.

Smaller companies will also be attractive as add-on acquisitions to larger companies and to private equity firms. With the recovery of the U.S. economy and with record-setting amounts of capital in the hands of large corporations (“strategic buyers”), Private Equity firms (“PE”) and hybrid buyers (neither strategic nor PE; for example, wealthy individuals and family offices), private business owners contemplating a sale are fortunately faced with a myriad of options. Smaller companies that have demonstrated a track record of profitable innovation and have a compelling brand that a larger acquirer could scale are particularly in demand. As a CEO, you might consider the following: Is this the right time to position my company for a near-term sale? To whom should I sell? Should I sell at all?

KEY TAKEAWAY: It might be the time to sell your business or seek an outside investor.

4. It will be a challenging growth year for middle-market companies.

Despite middle-market company predictions for growth, 2016 will be more challenging than 2015. New sales and revenue are going to be harder to come by as the U.S. economy begins to parallel the slowdown in the global economy. Larger companies, a source of demand for middle-market suppliers, will begin to cut purchases and work off inventory. The trend to rationalize procurement and decrease the number of suppliers will continue. Mergers of large customers will also take a toll on middle-market companies as will higher interest rates and declining available credit.

KEY TAKEAWAY: Now is the time to “batten down the hatches” of your business.

5. It will be politics as usual—and the gap widens!

Always hard to predict but always entertaining, this year should be especially interesting as we approach the presidential elections. But equally as important will be the congressional elections: 34 of the 100 seats in the Senate are being contested in regular elections, whose winners will serve six-year terms. In addition, elections will be held to elect representatives from all 435 congressional districts across each of the 50 U.S. states.

The gridlock over the last eight years has taken its toll on the credibility of our legislative and executive branches as well as on our economy, with no expectation of change on the horizon. Our political system and our politicians will play a significant role in creating economic volatility and uncertainty throughout 2016. The divergence and gap between the two political parties feels wider than ever and compromise will be increasingly difficult. One positive coming out of our politics: Growing bipartisan consensus on the need to address the deferred maintenance of our physical infrastructure, which could be a boon for construction and contracting companies.

KEY TAKEAWAY: Keep your eye on the elections as a barometer of the U.S. economy. Congressional elections will be as important as the presidential election in terms of determining the direction of the country. A sharing of power generally means a more stable economy. Single party power lends itself to greater extremes in social legislation and economic policies.

Consider early 2016 to be a time for extensive strategic planning for your business and market positioning. Prepare your business to survive and prosper through what may be a very challenging year.

Michael Evans is the National Managing Partner for the Newport Board Group.

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