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Achieving sustained growth remains a challenge for businesses of all sizes. Headwinds remain strong due to rising inflation and supply chain disruptions caused by China’s COVID lockdowns. And while the U.S. has been largely insulated from the economic impacts of Russia’s invasion of Ukraine, high gas and food prices persist in large part due to the war.
Still, small and mid-market businesses have reason to be cautiously optimistic. Consumer confidence remains buoyant, and demand for goods and services looks likely to continue. Meanwhile, revenue and employment growth for middle-market companies, in particular, remains historically high.
As we head into a new year, let’s look at five trends that small and mid-market businesses should plan for.
Gearing up for a recession
While a significant downturn is forecast for 2023, the labor market remains strong and consumer spend elevated — suggesting that any recession hitting the U.S. will be mild. But whatever transpires, businesses should prepare for what may lie ahead.
This starts with managing risk under your control and retaining a flexible cost structure and business model:
- Proactively plan for a slowdown in sales and profits. Focus strategies on your biggest and most important customers, partners, and investors, and strengthen relationships with them. And while raising prices may be necessary, be transparent about these changes.
- Review your supplier relationships. Consider renegotiating contracts and rates. You may also realize greater efficiencies by outsourcing certain functions to a vendor.
Also look for transaction opportunities. A downturn may offer advantages such as:
- M&A opportunities. Take advantage of equity market valuation premiums for scale, growth, and high margins in M&A opportunities.
- Be on the lookout for undervalued assets. Low equity prices may provide opportunities, too.
Prioritizing net zero
With a growing trend towards climate action and climate-related disclosures, companies will need to understand their impact on the supply chain and scope 3 carbon emissions.
According to the Environmental Protection Agency (EPA): “Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain.”
Prioritizing net zero is also a priority for governments. Against a backdrop of global energy shortages, reforms that reduce reliance on fossil fuels will likely continue. Indeed, the U.S. has a commitment to reach net zero greenhouse gas emissions by 2050.
With this in mind, the U.S. Securities and Exchange Commission (SEC) is finalizing climate-related disclosure rules for annual reports, registration statements, and prospectuses of any public company registered with the SEC or whose stock is listed on a U.S. stock exchange.
Regulations and mandates aside, the adoption of net zero strategies can help businesses save money, grow, and increase its resilience. Consider the following:
- Adopt a circular economy. Implement low-carbon practices that facilitate the efficient use of energy and resources. A circular economy can minimize or prevent waste from occurring by keeping materials and goods in circulation for as long as possible.
- Build sustainability into your supply chain. A net zero plan also helps businesses maintain reliable supplies during inflation, reduces waste and emissions, and helps guard against reputational damage due to supply chain risks (ex. use of child labor).
Environmental and other forward-thinking ESG strategies can also impact the valuation of an organization. Maintaining a strong ESG profile isn’t just a measure that regulators and consumers judge you by; it can also increase a company’s potential acquisition price.
In addition, businesses should pay attention to ESG-related litigation and other pitfalls. For example, any breach of ESG practices in your supply chain may result in a breach of contract or claims from customers and partners. Or, in the financial services industry, an individual or business may accuse advisors of negligence should they give incorrect advice about a fund’s ESG credentials.
Finally, be cautious of “greenwashing”, which involves making misleading or false claims about the “green” impact of your company’s products, services, or practices. A company accused of greenwashing may be impacted by negative publicity or even receive fines and penalties.
Talent acquisition and retention
Finding and retaining skilled talent will remain a challenge in 2023 — a trend only compounded by the continuation of the Great Resignation.
For small businesses in particular, where the cost of hiring and training is the highest, this is especially tough. As such, engaging with and motivating employees to stay will be a top concern.
With smaller budgets than larger companies, SMBs and mid-sized companies will need to explore strategies beyond traditional benefits to attract talent. These include benefits such as opportunities for progression, work-life balance, health and wellbeing, mentoring, and a flexible, hybrid workplace.
In the event of a recession, make sure to stay engaged with top employees and understand their mindset and their personal and workplace challenges. Getting ahead of these concerns, before they become a problem, will help you counter any offer they receive should they consider moving on.
Digitization for future readiness
Digitalization accelerated during the pandemic and is set to continue. Digital transformation and the adoption of automated, digital technologies are key to the future success of SMBs and mid-market businesses. Through digitization (making analog information digital), companies can realize greater efficiencies, free up resources, and embrace value-generating activities more effectively — all while increasing customer and employee satisfaction.
Despite being an essential step in digital transformation, digitization has not been a priority for many SMBs and mid-sized companies. (Digital initiatives have been largely limited to enhancing products and services, rather than production and service delivery.)
Smaller businesses do have certain advantages over larger companies when it comes to executing digital transformation strategies. For example, SMBs and mid-sized businesses are usually more agile and flexible in their ability to gather and integrate data sources for business insights and improved workflows. Information exchange and collaboration can occur much more seamlessly. Large companies, on the other hand, can be held back by siloed departments and stove-piped processes.
Moving into the metaverse
The metaverse — which combines virtually enhanced and digital realities into immersive, 3D experiences — is expected to transform how we work and live.
Since the metaverse opens new doors to enriched online and in-person shopping experiences, the retail industry is likely to gain the most from this new technology early on. But consider your audience. Mckinsey predicts that women will spend more time than men in the metaverse. Women are also more likely to attend events, shop, and exercise in the metaverse.
Women could also be at the front of metaverse development initiatives. A survey found that 60% of female executives have implemented more than two metaverse-related projects in their organizations.
Changing statutory and regulatory landscape in 2023
Every year there are amendments and changes to state and federal statutes and regulations that affect small and mid-size companies. And 2023 should be no different. Some of these changes are already known. Others will be enacted in 2023 and will require the owners and managers of these companies to act quickly and be nimble in order to deal with the consequences to their businesses.
- Digital assets laws. More and more small and mid-size businesses are now engaging in transactions using cryptocurrency and also own digital assets that they could use as collateral for loans. States are expected to begin amending their state commercial (UCC) laws to clarify issues involving digital transactions and facilitate the perfection of security interests in digital assets.
- Personal data laws. Many businesses collect personal data. They should be prepared to comply with new state consumer privacy laws that will go into effect in 2023 in Connecticut, Colorado, Utah, and Virginia, as well as extensive amendments to California’s data privacy law. More states may pass data privacy laws as well, and there has been talk about Congress enacting a federal consumer privacy law that bears watching.
- Environmental, social, governance/diversity, equity, and inclusion concerns. ESG and DEI are issues of interest for the legislatures of many states. As just one example, some states that have passed or proposed bills either encouraging or prohibiting state pension funds from investing in socially responsible companies. Several states have also passed laws addressing the lack of diversity on boards of directors. Although they have generally applied to publicly traded companies, it’s worth watching to see if any states will address diversity in private corporations.
- Beneficial ownership information reporting. The federal Corporate Transparency Act will take effect on January 1, 2024, and will require, by the federal government’s own estimate, 32.6 million companies to file a beneficial ownership information report with a federal agency called the Financial Crimes Enforcement Network sometime between January 1, 2024, and January 1, 2025. Companies should start preparing for reporting in 2023. Among other steps, they need to determine if they have to file a report (most small LLCs and corporations will) and come up with the policies and procedures to ensure compliance, as there are significant civil and criminal penalties if they do not comply.
- New business entity statutes. Every year you can expect at least one state to enact a new business entity law. We already know that in 2023 new LLC and LP laws will go into effect in Wisconsin and new LP and partnership laws will go into effect in Rhode Island. New laws can change compliance obligations and usually alter many default rules, making it imperative to review governance documents to make sure they reflect the owners’ intentions in governing the company and sharing rights and responsibilities.
In today’s rapidly changing society, predictive norms are challenged, and organizations increasingly rely on data, artificial intelligence, and predictive analytics to understand what’s next.
Taking advantage of these insights and determining what will work for you and your business today, as well as what will be required in the future, isn’t easy. Despite this, there is plenty of room for growth and opportunity for businesses that understand the latest trends, developments, and services.
As you navigate 2023, CT Corporation is dedicated to helping your business stay compliant so you can focus on the year ahead. If you want to learn more, contact a CT Corporation representative or call us at (844) 878-1800.