The Tax Cuts and Jobs Act of 2017, which slashed the corporate tax rate from 35 percent to a flat 21 percent and repealed the corporate alternative minimum tax, creates short-term and long-term growth opportunities for middle-market businesses.
The act boosts corporations’ after-tax profits, which gives corporations some fiscal breathing room, whether that is boosting employee compensation or making significant capital investments in their business. The act also paves the way for expanded merger and acquisition, with middle-market businesses considering expansion through acquisition or preparing their business for sale.
Employee Benefits
One-time bonuses were an immediate – and high-profile – employee benefit prompted by tax reform. But businesses are also considering other, longer-term changes to employee benefits, according to a survey by Willis Towers Watson. According to the Willis Towers Watson survey, middle-market businesses are considering boosting personal financial planning service they offer employees, increasing (or establishing) a company 401(k) match or adding a new paid family leave program. Survey highlights show:
Two-thirds of those (66 percent) surveyed are planning or considering making changes to their benefit programs, or have already taken action.
The most common changes organizations have made or are planning or considering include expanding personal financial planning (34 percent); increasing 401(k) contributions (26 percent); and increasing or accelerating pension plan contributions (19 percent). Other options included reducing or holding flat the employee payroll deduction, or adding a new paid family leave program in accordance with the Family Medical and Leave Act’s tax credit available for paid leave for certain employees.
Competition for top talent might the lead driver for middle-market businesses now evaluating the benefits they offer employees. Apart from the ongoing pressure created by a steadily growing job market, middle-market businesses that plan to expand see adding employees as the first step, according to the most recent KeyBank Middle Market Business Sentiment Survey.
Capital Investment
A smaller corporate tax bill might give middle-market business owners new appetite for capital improvements, either by expanding facilities or adding equipment, including new technology.
The KeyBank Middle Market Business Sentiment survey showed 54 percent of middle-market leaders participating in the survey expect to spend more on technology in 2018.
Technology is a critical differentiator for middle-market businesses owners who want to expand their relationships with existing clients and attract new clients. Adding emerging technology can help a business to operate more efficiently, provide a better experience for clients and support development of new services and products.
According to the KeyBank survey results, 39 percent of middle-market leaders stated they will allocate between 11 and 20 percent of their revenue to bolster technology. More than half of respondents stated they will spend more on technology in 2018, with a priority on obtaining cloud computing/infrastructure, customer relationship management, Internet of Things/beacons, artificial intelligence and app development.
M&A Considerations
Better cash flow might drive more middle-market businesses to expand through acquisition, particularly targets that, due to the new tax law, require or produce accelerated tax benefits for what the law terms “qualified property.” The act defines qualified property to include any tangible property with a depreciable life of 20 years or less. Examples of qualified property include computer software, machinery, land, property and other tangible assets.
Tax reform is also expected to make for a strong sellers’ market, which means middle-market business owners should revisit their exit strategies. That starts with keeping a close eye on three salient elements – equity and debt capital, so buyers can borrow at favorable rates; strong market conditions; and ability to demonstrate potential future market growth.
Next, business owners should take steps to make their company as attractive as possible by cleaning up financials, inventory and receivables, and showcasing a strong client experience. While buyer due diligence might start with assessing financials, inventory and receivables, a business’ long-term value rests with clients who benefit from a great client experience, and so are willing to bring more business to the company, and recommend the company to others.
Joe Plucinak is vice president and business banking relationship manager with KeyBank’s Vancouver office. He can be reached at (360) 828-7113 or joe_plucinak@keybank.com.
