James Barger, BridgeTower Media Newswires
When the Tax Cuts and Jobs Act of 2017 passed, reactions were mixed. Many economists and business leaders took a “wait-and-see” stance, with the most optimistic believing that slashing the corporate tax rate from 35 percent to a flat 21 percent and repealing the corporate alternative minimum tax would be a short- and long-term boon for businesses—especially middle market businesses. Another belief is that the 20 percent deduction on pre-tax profits of pass through companies (such as S-corp) will also spur growth and investment.
In the few months that have passed, many are still in wait-and-see mode. There are legitimate concerns about the law’s impact on the national debt and healthcare. However, for businesses, the impact of tax reform is beginning to crystallize. After-tax profit increases are driving businesses to invest—in people, in technology and in growth opportunities.
Immediate and long-term employee benefits
For those who follow the news, one of the most immediate and visible outcomes prompted by tax reform was the one-time bonuses paid to employees across a range of industries. In addition, many companies increased the hourly wage for their workers.
Perhaps more impactful is the trend of businesses looking at making long-term changes to employee benefits. According to Willis Towers Watson, two-thirds of the 333 middle market businesses responding to a survey said they are considering making a change to at least one of their benefit programs.
The most common changes or considerations 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.
A key driver for these changes is talent acquisition and retention. After-tax profits have businesses gearing up for expansion and growth, and many middle market businesses see their people as their most valuable resource. Businesses know that competition for talent is fierce, and the pressure of a strong job market is helping them realize that generous benefits programs can be a winning differentiator.
As Willis Towers Watson concludes: “The results of our survey, coupled with the actions taken by some large employers over the past few weeks, suggest that investing in people remains a top priority.”
This supports the finding of the most recent KeyBank Middle Market Survey as well, which showed that adding employees is most businesses first priority in their growth strategy.
Big investments in technology
A smaller corporate tax bill seems to also be giving middle market business owners a 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 than they did in 2017.
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 systems, Internet of Things/beacons, artificial intelligence and app development.
The data is clear: Middle market companies are planning to use technology to stand out.
Expanding through acquisition
Not only are businesses experiencing better cash flow, but overall most people are feeling optimistic about the economy. As a result, more than 70 percent of respondents to the KeyBank survey said they are likely to complete an acquisition in the next six months. Strategic acquisitions can be a quick path to growth.
The byproduct of businesses looking to expand through acquisition is that it creates a strong market for sellers. Middle market business owners who have been considering an exit should revisit their strategy to ensure they are positioned to leverage favorable market conditions. 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.
Regardless of where your business is at in its evolutionary cycle—start-up, growing or matured—tax reform is presenting significant opportunities, with early trends suggesting heavy investments in people, technology and expansion are where businesses are executing their growth strategies.
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James Barger is president of KeyBank’s Rochester Market. He may be reached by phone at (585) 238-4121 or email at james_r_barger@keybank.com.
