solar eThe dark clouds that loomed over our economy appear to have dissipated, but the sun is still not shining.  Even though second quarter economic data have brought hope for a steady economic recovery in late 2009, there are still systemic issues that require our attention; these issues have been brought on, in part, by  efforts to keep the economic ship afloat.

The good news for business owners and operators, however, is that they can once again expand their focus – keeping both day-to-day and strategic growth and liquidity issues top of mind.  To help with this always-complicated juggling act, I offer five core realities that are essential today – especially since the brave new world we once knew may have been lost in the storm clouds of 2009.

  • Taxes Will Increase – In order to underwrite the tab for our massive stimulus and bailout programs, taxes will have to increase.  While it is a foregone conclusion, based on recent campaign rhetoric, that capital gains taxes will increase along with income taxes on the highest income earners, keep your eye on H.R. 436 (“Certain Estate Tax Relief Act of 2009”), better known as the Pomeroy Bill.  This legislation was deigned to restrict perceived abuses of estate and gift planning through the use of business entities.  The Pomeroy Bill, among other things, proposes to eliminate any discount for lack of control and marketability on transfers of non-controlling interests in family-controlled entities.  The net effect will be to drive valuations and taxes up, which will diminish the value of family limited partnerships as an estate planning strategy.
  • Changes in Accounting Will Impact the Bottom Line – A number of GAAP changes are currently under discussion, and they are designed – not surprisingly – to increase the amount of taxes paid by businesses and limit their ability to book losses.  The most concerning change for many is the contemplated repeal of last-in-first-out (LIFO) accounting.  LIFO has a dampening effect on net income because of a cumulative downward impact on inventory valuation.  LIFO helps minimize taxes in a period of rising prices if the most recently purchased inventory is used to calculate the cost of goods sold.  A repeal of LIFO would result in higher taxes in the current period as well as in back-tax obligations and future inventory management challenges.
  • Inflation Will Rise and the Dollar Will Fall – Quantitative easing, or the purchase of U.S. Treasury bonds by the Federal Reserve, is an inflationary measure that has put pressure on the U.S. dollar.  As evidenced by recent price retrenchment in the bond market, interest rates are rising and inflation is building.  The good news is that this inflationary cycle appears predictable.  Businesses should begin taking steps to adjust prices and lock in labor rates where possible in order to avoid the negative consequences of changes in real income.  As we all know, persistent inflation has the ability to once again undermine the functioning of our economic system.
  • Now is the Time to Recruit Talent – National unemployment will likely peak around 10%. While the Pacific Northwest has held up reasonably well relative to the rest of the country, there is talent aplenty seeking new opportunities.  Now is the time to consider upgrading your human capital in areas where you might be vulnerable.
  • Don’t Take Your Eye Off Your Bank – While the national banking picture appears to have stabilized, more than 300 banks remain on watch by bank regulators.  Most of these are regional banks in markets where housing prices have decline precipitously.  Talk to other business executives and agents to understand who is lending, and begin to build relationships with back-up lenders in case your line is pulled or reigned in for reasons beyond your control.

For those seeking growth capital or liquidity, multiples remain near their lows; this is, in part, due to a slow lending environment.  While we wait for the markets to thaw, try to get ahead of the curve on the issues we’ve mentioned above.  If you can do that, you stand a better chance for a successful deal dynamic as the recovery takes hold in 2010.