SMB Market Observer - Q3 2022

Written by
Tim Ludwig
November 14, 2022
SMB Market Observer

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Given the broader economic environment, we expected this quarter’s survey to capture some interesting trends and insights. We weren’t disappointed.  To start, based on a nearly identical number of responses to last quarter, our SMB Optimism Index average fell modestly by 4% from 7.6 to 7.3.  The overall distribution skewed just slightly more negative due to changes at the higher and lower ends of the range of scores.  At the highest end of the scale, fewer people (4%) gave a top score of 10 compared to last quarter, when 11% gave the highest score possible. On the more pessimistic end of the scale, 18% of the respondents rated their outlook for the next quarter at a five or below compared to just 11% last quarter.

The four dominant themes during the most recent quarter were:

  • Inflation;
  • Labor issues;
  • Supply chain challenges; and
  • Softening demand

The first three have appeared in both of our prior surveys while the last is a new entrant to the conversation. It doesn’t appear to be widespread, but these early responses may be a bellwether of further softening in the coming months.

Continue reading the rest of this report to get more context on each of these issues along with things that are going well in the SMB community and other odds-and-ends that are less representative of broader trends, but still interesting.

What is your greatest business challenge right now?

As has been the case for all of 2022, labor issues remain the predominant challenge for most small businesses according to our survey respondents.  Inflation, which also is impacting wage rates, also remained a challenge for many, though in some cases price increases are mitigating the margin compression or eliminating it entirely.  

On the labor shortage:

  • “Hiring people across the board, but specifically sales reps.” – Operator, Wholesale/Distribution
  • “Finding and retaining qualified employees.” – Lender
  • “Right now, it is scaling and acquiring talent.” – Business broker
  • “Finding good employees at the lower end of the wage scale.” – CEO, PR firm
  • “Entry level labor.” – Operator, Roofing and siding
  • “Hiring. Finding the right people for the right seat.” – Investor
  • “Hiring professionals”, “Finding good employees”, “Skilled labor!”, “Finding people that like to work”, “Finding qualified talent/employees”, “labor still scarce”, “Hiring” – Various

On inflation:

  • “Vendors increasing costs more than we can raise prices.” – Operator, Coffee roasting and cafés
  • “Inflationary pressure on consumer retail demand.” – Operator, Health and wellness
  • “Managing input price inflation.” – CEO, Construction
  • “Maintaining profitability with vendor price increases happening monthly.” – CEO, Manufacturing

On changing demand:

  • “Decline in demand.” – Operator, Plastics manufacturing
  • “Generating profitable, new client relationships.” – CEO, Recruiting and staffing company
  • “Leads!” – CEO, Property management
  • “Clients are hesitating, some pulling commitments.” – CEO, Construction
  • “Consumer demand is slowing. We’re having to spend more for fewer leads.” – CEO, Residential HVAC & plumbing
  • “Quality lead generation.” – Operator, Playground manufacturing

Other answers:

  • “Economic outlook over the next 3-12 months.” – Investment banker
  • “Supply chain and access to capital.” – CEO, eCommerce
  • “Good deals at reasonable prices. While cost of capital (debt and equity) has increased, prices have not come down yet.” – Investor, Energy and media industries
  • “Supply chain - Key vendor lead times have stretched from 1 month to 9 months, if the PO gets filled at all.” – CEO, Printing and paper industry
  • “Cash flow. Long receivables, quick payables. Also cleaning up other debt and stale payables. Managing with our line of credit.” – Operator, Commercial landscaping

What is going really well in your business?

Despite the challenges outlined in the prior question, many businesses are seeing strong demand for their products and services.  In fact, unlike in our prior reports, the answers were almost universally related to strong sales, regardless of industry, role, or geography.  

On demand:

  • “Sales have almost doubled and the team has grown. Culture is excellent.”– CEO, Industrial parts distribution
  • “Significant growth in work related to corporate M&A, real estate development, investment funds and commercial litigation.” – Attorney
  • “Client leads are abundant.” – Operator, Healthcare services
  • “Our deepest, most significant client relationships are growing and thriving” – CEO, Staffing firm
  • “Fully booked and turning customers away, but that is from 6-12 months previous pipeline.” – Operator, Special events and entertainment business
  • “Winning new business. We are growing, and that is exciting.” – CEO, Facility services
  • “There are a lot of small businesses with good liquidity positions looking to grow their businesses. We have seen a fair amount of increased activity in the non-real estate-based borrowers. Definitely some hesitancy to the overall outlook but actively seeing equipment additions, working capital loan needs, and business acquisitions continue.” – Lender
  • “We are still busy. Orders remain strong and hiring has gotten a little easier.” – CEO, Manufacturing

Other answers:

  • “Recurring revenue maintains its quality.” – B2B Software CEO
  • “Improved margins from declining input costs.” – Operator, Manufacturing
  • “Energy space is doing well after years of consolidation and investment (losses). Inflation is being dealt with by accepted price increases.” – Investor
  • “Labor market has loosened up. Where we were paying $40-45/hr. for lackluster technicians a year ago, we're able to hire rockstars for $30-35/hr. now. This appears to be because competitors are feeling the demand crunch and techs that were commanding those high wages last year were the first to get cut.” – CEO, Residential home services
  • “Customer demand. Hybrid work is driving increased interest in our product and customers are pulling us in.” – Investor

What new trends have you noticed recently or do you expect to see in the near term?

While our respondents were largely bullish about their business’ prospects, they expressed more concerns around the economy in their responses to this question along with some anecdotal comments about improvement in the labor markets and the emergence of some impacts from rising rates, among other observations.  

On the economy and interest rates:

  • “Instability in the domestic construction market due to interest rate hikes.”– CEO, Industrial goods
  • “We’ve seen a few projects halt due to macro concerns.” – CEO, Commercial services
  • “There are definitely a lot of business owners that are seeing good business today that are being conservative about the next 12-24 months in their planning. This is driving more working capital planning, liquidity building and conversations around staffing.” – Lender
  • “Developers are rushing to start projects in the pipeline as interest rates go up.” – Attorney
  • “Clients/network are weary of financial distress and have a lot of dry powder and /or are deferring opportunities until the dust settles.” – Lawyer
  • “Founders hesitant to explore transaction processes.” – Investment banker
  • “Small businesses are struggling with increased debt costs, rent, and cost of labor.” – SBA Lender
  • “General economic headwinds will continue and probably get worse which will affect cyclical businesses most. We should see some welcome normalization in the supply chain which should help dampen the effects of inflation but I think inflation pressures will continue.” – CEO, Distributor

On labor:

  • “Better labor availability.”– CEO, Manufacturing
  • “Labor market seems to be improving for business owners.” – Operator, Property management business
  • “We anticipate the changing labor market dynamics to have some impact on our business, at some time. The exact impact is unclear. So far, we're feeling continued difficulty in adding new client relationships, but that is not necessarily a new dynamic or one that we believe is certain to increase.” – CEO, Recruiting company

Other answers:

  • “Bifurcation between strong businesses and weak businesses in our industry. The strong are performing very well, the weak are performing very poorly.” – Investor
  • “Customers not fazed by price increases at all.” – Investor
  • “Customers do not even balk at price increases, a big departure from years past. I expect development and residential (even in Texas) to slow over the next year.” – CEO, Manufacturing
  • “Equipment financing has become very tight. Manufacturing on-shoring is a positive long-term tailwind, but the strong dollar is making the choice difficult for customers.” – CEO, Semiconductor equipment manufacturer
  • “Labor market seems to be shifting back in our favor as an employer.” – CEO, Home services business
  • “We've just signed a lease for a new building as we've outgrown our current space. The "future of work" as it relates to office space planning has been really challenging for me, as I struggle to imagine both where we will be as company in 3-5 years from a square footage perspective (mix of hybrid, fully remote, etc.; will we be hiring locally; as well as raw team size) and where the job market will be in terms of employee expectations.” – CEO, Facilities services
  • “Efficiency created by technology are trickling down to sub mid-market companies. Overseas employees are becoming more prevalent.” – Investor
  • “Multiples are starting to reverse lower. Which I think is a good thing. Inflation having some small impact on business.” – Business broker
  • “Tightening credit market on larger deals, but has not spread to deals with enterprise values below $20 million.” - Investor

What are the most common issues voiced by other business leaders in your community?

The responses to this question brought a return to many of the common themes from earlier responses.  There were many comments about labor, inflation, the economy, and supply chain issues.

On labor and wage inflation:

  • “People - finding, keeping, managing good people is hard. Home services owner shared a lot of their leading indicators are down quite a bit.” – CEO, Industrial parts
  • “Finding and retaining staff. Recovering from the Covid interruption.” – Lender
  • “Labor still tight, but think it might open up in the next 12 months.” – Investor
  • “Inflation, talent acquisition, and the whipsaw from COVID and post-COVID.” – Business broker
  • “Hiring remains very difficult and money is tight.” – Lawyer
  • “Trouble finding good people. Good people taking other opportunities. Shortage of trucks and licensed drivers.” – CEO, Events industry
  • “Labor shortage. Inflation. ‘Millennial employee issues.’" – CEO, Facility services
  • “The largest continues to be wage growth management and staffing needs.” – CEO, Financial services
  • “People problems galore!” – CEO, IT services firm

On the economy:

  • “Concern over future cost of capital and the threat of diminished demand.” – Operator, Manufacturing
  • “Gas price (in CA), cost of goods sold prices have increased, but not in line with price hikes.” – Investor, Retail industries
  • “Delays in customer decision making related to recession anxiety.” – CEO, Manufacturing
  • “Economic environment softening significantly.” – Banker
  • “Fear of macro headwinds.” – Investor

Other answers:

  • “Big Tech headwinds (Apple/Google/Facebook) and recruiting/staffing.” – CEO, eCommerce company
  • “Valuation gaps are increasing and deal flow is slowing.” – Investor, Agriculture and nurseries
  • “Supply chain. For those that heavily outsourced and off shored their supply chain, delivering product on time is proving very difficult.” – Investor, Technology

Closing Thoughts

According to these responses, Q3 generally resembled Q2. While somerespondents noted that demand has started to soften, they were still in the minorityof our survey.

With all of the headlinesabout the economy, interest rates, the decline in public market indexes, andother gloomy forecasts, I don’t detect as much evidence of that from ourrespondents as I’d gather from mainstream media reports.  Perhaps our sample isn’t representative ormaybe small businesses in this case are slower to feel the impacts than largerones? Or, it could be something else entirely. I think the more interestingconclusions will appear over longer measures of time and that regular readersof this report will be able to look back a few quarters from now and see a muchclearer story about what was happening during these last few months.  With mid-term election results now almostfinalized and a new year quickly approaching, we’ll all turn our eyes to 2023.