2018 was far from “more of the same” that we have come to expect, economically speaking, with a big feature being “nervous nellies” or more accurately volatility.
The Australian economy will end up with:
GDP growth somewhere around 3%.
Unemployment rate somewhere around 5%.
Inflation (CPI) somewhere around 2%.
AUS/US exchange rate of approx. 70 cents.
For the most part the Federal government has managed to shift towards a budget surplus, increased spending on infrastructure and pushed tax cuts for most of the SME market. Some may argue it managed these outcomes despite its best efforts – others will be thankful for any results at all.
Financial year results for ASX200 companies announced in the latter half of the year have increased 4% and revenues increased 8%. Despite this the ASX200 fell 3% across the year. Overall the ABC has reported that $120b of value has been wiped off the ASX during the year.
This is probably in line with earnings, given that in real terms they increased only marginally. So it would be expected that share prices would fall given some of the uncertainty in both Australian and global economies.
We have given more comment on this in our latest Valuation Affairs newsletter, although the data is primarily up until end of November 2018. Our next issue will include December 2018 statistics.
Some of the headwinds and economic risks business has had to face include:
Central banks starting to unwind their quantitative easing - effectively removing funds from the market and tightening liquidity.
Increasing interest rates (The US Federal Reserve has started to increase its cash rate and is expected to increase at least two more times in 2019 - or more).Tightening of credit by the banks which has had the impact of an out-of-cycle rate rise.
Falling housing prices.
Falling Aus/US exchange rate (hurts importers but is a positive for exporters).
US/China Trade wars.
But some of the positives for business have included:
Reduced tax rates
Falling Aus/US exchange rates (helps exporters and has supported a growth in tax collection from increased commodity volumes).
State and Federal Government spending on new infrastructure, which has flow on benefits to some business sectors.
Low interest rates and likely to remain low for 12 months.
Moderate revenue growth achieved (average revenue growth for ASX200 in FY18 was 8%).
Our view of 2019 is that business growth will reward those that can introduce new products or services to existing markets or improve the effectiveness of what they can do now. Growth across the board will be hard – however some sectors such as freight and transport, professional services and education and training have on average increased revenue. Businesses that focus on existing markets and product or service innovation are likely to be most rewarded for the investment, assuming that the execution of these strategies is effective.
So based on our experience with businesses, and the trends we have seen, we have detailed our Top 9 SME Trends and Opportunities that will deliver increased valuations for SME’s in 2019.
1. Grow the pie and service your existing customers: The quickest wins will come from marketing new products and services to existing customers. The December 2018 Westpac Small Business Report found that growth in revenue for the past 12 months has been primarily from “…businesses growing their domestic customer base incrementally (58% of respondents)” and that 49% of business surveyed grew through “…offering new products or services (49%)”. We believe that with GDP growth running at 3% or less (and only 1% in real terms), you either need to increase market share from your competitors or offer new products and services to a market that already has a relationship with you – your existing customers.
2. Cohesive and clear marketing across all platforms that encourages client or customer interaction: Video content, live streaming, multiple online channels and a variety of other ways of getting interaction with customers will deliver the significant revenue growth to those businesses that do it right in 2019. The online marketing phenomena will shift away from a collection of likes and connections to how you interact and listen to your markets, and what you do to encourage them to buy from you.
3. Online sales: This channel will tend to deliver the highest growth rates, although for many businesses it remains a small fraction of total revenue. We have seen annual growth rates of between 10% – 20% pa over the past five years in some industries from online sales. This channel is no longer a differentiator but now a necessity for most businesses, and finding ways to do business online should be
4. Consistent and clear business reporting: We have seen many examples in 2018 of businesses that have not got this in place and are struggling to manage the cash flow crises and fires that a lack of reporting hides. More importantly the businesses that do get this right are often in control of their strategies and performance and are more proactive in dealing with issues before they become forest fires. Improvements in accounting services, cloud based software and an abundance of online help should now makes it even easier to have instant reporting of sales, key costs and other key performance indicators that make monitoring and decision making so much more effective.
5. Artificial Intelligence (AI) and Virtual Reality (VR): We see AI as not the high-powered automation involved in self-driving cars or chess playing robots. But we do see some simpler AI in areas such as linking customer purchase data to some new offers of regular monthly “boxing up” of products or services, or using voice-enabled technology to automate the purchasing process, or using a combination of an app (API), Google Maps and software to provide better customer information on delivery status of orders.
6. Connecting devices to create new services: The Internet of Things (IoT) promised to take off more than five years ago, but it has been a slow burn. With the advent of Google and Alexa voice activated devices, automation is becoming more commonplace – and not just opening and closing the curtains. The use of apps (APIs) and powerful smartphones means most businesses can put some form of control in the hands of customers. Integrating this with device location and voice capability will provide opportunities for businesses to tailor products and services to customers in ways not achieved before.
7. Combination of banking, payments and online purchase technology: Fintech was a buzzword in the past couple of years, and whilst bankers are likely to see more regulation as a result of the Banking Services Royal Commission, clever SMEs will streamline cash flow and link it to more flexibility in business financing. Our opinion is that the more innovative banks will link financing facilities with sales through automated monitoring of buying trends and purchases.
8. Employment will become more innovative and remote: We have seen the rise and a slight trip in the contracting sector, with regulation likely to limit growth of Gig-employment. However clever SMEs will find innovative ways to employ people in more flexible ways. Whilst not all businesses can use remote employees, a combination of contracting, technology and use of off-shore resources for basic functions will provide opportunities for business to get more done with less. “In-house” employees are likely to be focused on more value-adding activities and leave more mundane processes to other resources.
9. Health and Wellness as a focus: Whether this is providing health and wellness products and services to customers or focusing on the health of employees, this area will become a major focus on 2019. Health and wellness issues in the areas such as aged care, dealing with obesity and related illnesses, medical research, disability services and mental health will drive new products and services to meet the growing trends. Healthier food options, provision of health and wellness information and coaching, wearable devices and clothing will provide SME opportunities to grow revenue.
Based on our recent updates to SME EBITDA multiples, we are seeing business size(both in revenue and EBITDA results), clarity of financial reporting and reduced key person risk as being the main drivers of business valuations.
As part of your plans and strategies for 2019, focus on the initiatives that will deliver on those key variables in order to make sure you are increasing the value of your business.
If you want to discuss how some of these opportunities may help drive the value of your business or find out how much your business is worth then send us a contact enquiry here.
This post includes general advice that is the author’s opinion, and does not include any statements of certainty. We have made our comments based on a review of a wide variety of information and are not responsible for the accuracy of any of our sources. Any commercial decision should be based on advice from experts within the respective fields and industries.