Optimism among medium-sized companies, faced with high levels of economic uncertainty, fell from 64% to 59% in the past year. Grant Thornton International conducted a study, published in the International Business Report, that tracks sentiment in the business sector around the world. Despite this decline, optimism is still above the historical average, which indicates that there is still a possibility for things to return to "normal".

Many economies around the world are preparing for a rather unusual recession – one characterized by conditions associated with booms, such as low levels of unemployment (instead of increasing levels) and raising interest rates (rather than falling). These unusual characteristics, combined with a recession that will, according to many experts, be shallow and short-lived, could mean that the usual way of responding to a recession may be the wrong choice for the companies. For example, now may not be the right time to downsize in order to save on costs. With a record number of businesses citing the availability of skilled workers as a key barrier to growing their business (57%) – if the recession is short-lived, laying off qualified employees could lead to even greater difficulties in finding skilled staff later, when demand picks up again.

Unpredictable struggle with recession

There is no doubt that businesses are struggling with the unpredictable signs of recession. Economic uncertainty and energy costs are still the main problems at the global level, and 60% of companies cite them as a limitation to the development of their business. This is followed by the availability of qualified workers (57%) and labor costs (55%).

Dino Bendeković, director of corporate finance for the northern Adriatic region, states: "One of the consequences of these expectations and economic reality is the increase in activities that lead to changes in the ownership of small and medium-sized enterprises. For some time, there have been tendencies to solve the issue of ownership succession and change of management board members in small and medium-sized companies by selling majority or 100% shares to corporate investors. These situations are noticeable in the wider region of Central and Southeastern Europe, and now in Croatia as well. This trend is now additionally supported by the concerns of the existing owners about finding new jobs, international markets and new clients, who, for these reasons, also started looking for international corporate investors."

Concerns about a lack of financial resources have somewhat decreased (to 47% compared to 50% in the second half of last year). However, the true impact of rising interest rates compares to historical figures, which are now double the average, which was 22% before the pandemic. This also applies to energy costs, which is for 60% of the companies the main reason for concern, compared to 29% on average before the pandemic, as well as quality transport infrastructure, which 49% of them cite, compared to 16% on average before the pandemic. A shortage of orders is another constraint that 53% of mid-sized businesses think about.

Major Global Concerns

Inflation and a tight labor market have led to 82% of business leaders expecting a pay increase in the next 12 months. However, there is a clear limit to what businesses can afford, with only 24% of businesses indicating they intend to make "real increases" in the next year. Despite these constraints on business growth, the desire among mid-sized companies to expand internationally remains strong. The percentage of companies that expect an increase in exports in the next 12 months recorded a slight increase to 45%, while 40% of them expect an increase in income from foreign markets, and 41% expect an increase in the number of exports during the next period.

While 55% of companies expect an increase in profitability in the next year, future business investment intentions are generally in a slight decline. The main focus of the companies is on technological progress, which is cited by 57% of companies, although this is a decrease of 3% compared to 60% in the first half of last year.

Dino Bendeković also states: "Company owners who think about retirement and do not have capable or interested successors, or those who are looking for strategic (as a rule, international) investors, should approach succession planning more urgently, especially if they have postponed retirement because of fear of leaving a business with an increasing income. Selling a company will undoubtedly be much more difficult due to the bad economic situation, or the sale itself will take longer. The best way to start the selling process is with an evaluation and advice from an authorized expert, to see how much your company is really worth. Even if your company's value isn't what you envisioned it to be, experts will help you understand ways to boost the value by providing insight into what drives your company's value. You should also consider hiring an M&A advisor to guide you through the demanding process of finding investors and through the sale process itself. Advisors provide value by using their expertise to create a competitive cross-party sales process, which is key to selling a business at a price commensurate with its value..”

For more information on this topic or for help with the process of selling a business, please contact our local experts at Grant Thornton.

Data source: Grant Thornton International