Election year for the corporate community can be defined by one word: limbo.
This kind of environment can be restrictive for middle market companies considering an exit, as political uncertainty can make decisions more difficult on both the buy and sell sides of a transaction.
But democracy reigns in America. This year, business owners can take the future of the M&A market to the polls.
Filtering the Noise Before the Ballot
All politicians have the same goal during election season: They want your vote, so issues become magnified and deliberated during an election year. The sheer noise from debates, advertisements and commentators can be deafening.
It’s important for middle market business owners to filter the onslaught of persuasion and rhetoric and to vote with future business transactions in mind. Look for politicians’ stances on things that improve profit margins and economic growth and hold influence in the corporate sphere.
Specifically, here are areas where business owners looking to sell should perk up their ears and where they can afford to disengage.
TUNE IN: Capital gains taxes. Capital gains tax rates directly impact owners of private companies who sell their businesses. Profits with middle market transactions can be rather attractive, so potential sellers will care about the government’s take. If the rate is likely to rise, we could see the M&A deal pipeline expand as owners try to act before regulations change.
TUNE OUT: Immigration reform. While illegal immigration may have a direct impact on some companies managing non-skilled labor, from an M&A perspective, it doesn’t move the needle much. The only time in which immigration issues become particularly relevant to potential business transactions is when they concern getting the best talent into the country. Skilled labor can be a company’s differentiator, so businesses that rely on top-tier talent from outside the country would need to examine visa policies. Beyond that, other topics like physical border control, citizenship and many other immigration issues can be lower on the priority list.
TUNE IN: Regulatory change. The recession generated a lot of regulatory changes, and it kept many companies and industries in a constant state of movement. Stability—or the lack thereof—will be an important factor in the upcoming transaction landscape. When regulation changes continually affect corporate operations, reporting and government relations, it’s harder for the market to stabilize, which can make transactions more difficult.
TUNE OUT: The Second Amendment. Gun violence is undoubtedly a serious issue, and and it’s being hotly debated in the public eye. Even so, the Second Amendment argument doesn’t enter the fray of corporate transactions. That is, unless you’re in the firearm industry, in which case, take note.
TUNE IN: Economic growth. A strong economy undergirds a healthy M&A environment. Most middle market companies sell to the domestic market, so it’s important that potential consumers have money to spend. Voters can identify champions of economic growth by examining candidates’ policies for getting more people back to work and encouraging smart spending.
TUNE OUT: Foreign policy. No one would argue the value of homeland security. But, when choosing a candidate that will improve corporate transaction environments, foreign policy and state relations aren’t big factors, at least generally speaking. Defense tactics, military strategies and surveillance policies don’t contribute much to the M&A conversation.
TUNE IN: Energy Policies. Energy legislation can directly impact productivity and profitability of many industrial companies, like manufacturing businesses. For instance, tighter regulations on coal emissions can force companies to change energy sources, which can cut into profits or push costs into the marketplace. For these companies—and businesses and regions that rely heavily on them—it’s wise to key in on the energy discussion.
TUNE IN: Human capital. Employees define a good company, but they also cost money. Find out how the candidates’ policies will impact the workforce. What do wage costs look like? How might candidates support a strong employment pool? Top talent and profit margins are keys for sellable companies.
TUNE OUT: Social issues. Like gun control, foreign policy and other platforms, social issues—such as abortion, government contraceptive mandates and assisted suicide—resonate little with corporate welfare. Move on to other issues when looking through an M&A lens.
Don’t Take Your Eye off the Ball
The political spitfire of an election year can drain any business owner. So it’s important for middle market executives to not become distracted by political rhetoric. Yes, elections are foundational to our free market society, and it’s our civic duty to exercise that right. But the outcome of an election—short of a candidate who completely overthrows the established government—is secondary to M&A vitality. The most important determinant is, and always will be, the health of your company. Simply put, do you have something worth selling?
This election year, focus on serving customers well and getting new ones. Develop a company culture in which your best employees are inclined to stay. Make your vote count, but also make your business thrive.
Frank Williamson is managing partner at FourBridges Capital Advisors, an investment banking firm serving business owners across the Southeast.
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