Government Impact on Entrepreneurship & Employment

Nov 2, 2015

Successful execution of strategic plans based on proper assessment of market trends & conditions is a trademark of entrepreneurs who create & build profitable, privately held companies. The business elements of product development, personnel, marketing programs, infrastructure creation, and served customers & geographic areas can be influenced & controlled by executive management. The business elements of economic conditions, government policy, regulations & taxes, and weather cannot be managed and require sound business practices & acumen by an entrepreneur to navigate successfully.
November 3, 2015 is Election Day in the United States. History has demonstrated that elections have implications for small business entrepreneurs and their employees. In 2008, President Barrack Obama was elected by the people of America and his party was provided with majority control of the both houses of Congress. That election resulted in the passage of the Affordable Health Care Act. The passage of that act had a significant impact on small business owners and their employees in the United States, as business owners were forced to either modify their employee health care programs to match the requirements of the law or stop providing health care insurance and direct their employees to the private marketplace or the government regulated health insurance exchanges. Some employees benefited from the law, others saw their out of pocket costs increase and the level of coverage they had available to them decline. Small business owners frequently saw their personnel related operating costs increase and the profit they personally received for taking entrepreneurial risk and employing sound business practices decline due to new expenses and taxes. Additionally, any decline in profitability for a privately held company impacts the market value of the business when the business is sold. This is a prime example of how federal government policy can impact business owners & the employees of privately held companies and family businesses.

Government impact on entrepreneurs and their employees can also occur at the state & municipal level. A current political/government trend in the state of Washington is to increase the minimum wage to $15 an hour. The infrastructure has already been put in place to achieve this goal in the cities of Seattle & Sea-Tac. Voters will cast ballots on a similar initiative in Tacoma this week that will impact any business with gross revenues above $300,000 (To put that in perspective the law will impact all family businesses generating an average of more than $820 a day in revenue regardless of their level of profitability). At face value, the goal to increase take home pay for employees is a noble one, however analysis should also be done related to the resulting impact on small business owners and their employees. IBA, as a diligent tracker of trends & conditions that impact the entrepreneurial community, has already identified multiple situations where the trend has started to impact business owners and their employees. The first place we experienced an impact of the change is from entrepreneurs considering the sale of their business to facilitate retirement goals. IBA has had several clients move up the time table of their sale due to the legislation out of fear of the impact on the value of their businesses.

One example of this was the owner of an eight location chain of franchised restaurants who identified after being educated by IBA on business valuation that the value of his company would decline significantly if labor costs increased. He recognized decreased profitability is compounded when valuing a company as goodwill value is commonly determined by employing a multiple to EBITDA. This entrepreneur employed IBA to sell his restaurant chain and completed the transaction earlier this year. In a similar context, an entrepreneur valuing a company for potential acquisition should incorporate future labor cost estimates based on legislative requirements into pro forma projections for the time period following acquisition.

A second potential impact of the Seattle legislation was observed recently by several IBA professionals while eating at Applebee’s. Applebee’s recently employed tabletop units at their restaurants in the Seattle metropolitan area to facilitate ordering of food & drinks. The motivation for the units is unknown, but our group recognized that for a company like Applebee’s an allocation of labor to technology infrastructure will likely over time help facilitate a reduction in staff and the resulting costs associated with increased labor rates and health insurance provision requirements. An impact on employment opportunities for young adults and people seeking part-time employment will also likely be felt.

Another unintended consequence of the legislation is the impact on people who receive services & benefits from the government. I have a developmentally disabled brother who lives & works in the Seattle metropolitan area. He is employed in the community to help with recycling. He values his paycheck and the independence it creates, however greater value is perceived in having responsibilities & purpose in his life. The legislative trend has resulted in the creation of two concerns for our family community moving forward. The first concern is that government mandated increased cost associated with employing people with disabilities will have an impact on the number of opportunities available for people in that community. The second concern is that increased financial compensation could result in the loss of services & benefits from the government. The potential loss of the services & benefits would result in a need to reduce hours of employment, an action counter to achieving the highest benefit perceived from working for people with disabilities, a sense of purpose and regular engagement in the community. The concern related to the potential loss of services & benefits as a result of higher compensation is not limited to the developmentally disabled community; the concern also exists for individuals & families receiving social safety net services & benefits.

The goal of this blog is not to advocate for one side or the other of an issue. It is to convey that government policy that is beyond the control of entrepreneurs can impact their business models. The good news with government regulation & policy is that every citizen in a democracy like America has the ability to impact government with their vote. I encourage all business owners and employees who work for a privately held company or family owned business to cast educated votes on Tuesday and take ownership for creating the environment for small business they want in the future.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.