Financial Crystal Ball for 2017

In my last article I told readers that regardless of who became president that little would change for small business owners in the trenches.  Well, I’m sticking to that prediction, even in light of the upset by the self-proclaimed “pro-business” candidate. Sorry guys – but big changes aren’t going to happen for small businesses.

For foodservice operations and the vendors that provide them with their supplies the question is very simple.  Will there be more customers who can spend more money in my business and will my costs go down so I can be profitable?

Let’s look into the crystal ball and see which important issues will be affected and what that means for you. Since our industry is a “leading indicator” for the overall economy, this is an important exercise for us to explore.

• Taxes – The new administration said they are going to slash taxes, which means more money to spend and the economy will boom – right?? Tax cuts are always a good thing for businesses, but who will actually benefit and what are the ramifications? The sound bites are very convincing, but….. 

• The reality of cutting corporate taxes to 15% is that it will only benefit larger corporations – not the average small business owner.  Despite claims to the contrary, the new tax plan is not friendly to small businesses, which typically have pass-through tax structures like LLCs, partnerships and sole proprietorships. The taxes are paid by the owner as personal income not as corporate taxes. Ironically, these middle class business owners will have a personal tax rate that is far higher than the corporate rate and, in many cases it is going up – therefore taxes will actually cost them far more. Bigger companies like suppliers and wholesalers however will enjoy the tax break, but don’t expect them to pass through the benefits by reducing their prices. So unless you have a fairly large, profitable company, a lower corporate tax rate means little or nothing to you. 

Women’s Foodservice Forum February 2019 728×90

• What about the promised personal income tax cuts? Won’t cuts stimulate the economy by giving people more money to spend? Once again, I’m sorry to say that the proposed tax cut will only benefit high income earners.  Most average working people will actually pay more. One example of a single parent with 2 kids earning $75,000 shows them paying $2,440 MORE in taxes, not less. For other upper middle-class families (earning well over $100,000) the tax cut will only be about 2%, but the richest top tier of Americans will get an average windfall of 13.5%. Some sources argue that the elimination of the Alternative Minimum Tax provisions will cost many average income earners even more in taxes.  Not exactly a stimulus helping working class people to eat out more.

• Hourly Wages – Many of the restaurateurs and suppliers I have spoken to look at this as one of the biggest issues they are facing, but it is not one being driven by the feds.  Most of the push on this issue is coming from state governments, so we shouldn’t expect this issue to slow down. Companies like McDonalds have said they would fully automate their operations if they face a $15 per hour minimum wage.  Now there is an economy killer for you! If the under employed can’t get a job in McD’s what is left for them, a job at DMV?

• Bringing Jobs Back to the US – The dream is a good one and the logic is that if the American working guy has money in his pocket, he can spend it in your business.  Makes perfect sense. You also know that one of the biggest expenses for a business is labor and benefits.  Ask yourself – if you could operate your business with 1/3 the labor cost you currently have – would you?  Dumb question right?  So why would a sophisticated corporate management team choose to dramatically increase their labor costs by replacing cheap offshore labor with high priced American workers? Don’t expect the new administration to tell business owners to “do as I say, not as I do” and force other American companies to stop using cheaper off shore labor.  It goes against everything they built their organization on.

• Immigration – OK guys – let’s get real honest here.  Build a wall and your labor costs will go up. The restaurant and foodservice industry is one of the sectors that is most guilty for hiring and supporting legal or illegal immigrant labor.  The fact is that they take the jobs that most Americans won’t touch and accept lower pay, often being paid under the table.  American business owners and customers both benefit from this labor pool in the form of lower costs and lower prices to the customer. Believe me, few of the people screaming about taking American jobs back are running to build a career as a dishwasher or busboy!  The nasty truth is that a more aggressive deportation program will blow a gaping hole in the side of many restaurants and it will need to be filled with higher paid legal labor.  Your costs and your prices will go up. Customer counts will go down and I predict many more businesses will suffer and more business closings will result.  Be careful what you wish for!

• Affordable Care Act / “Obamacare” – This very controversial legislation is over 1,000 pages long and most small business owners have strong opinions yet possess limited or no understanding of what it actually helps or hurts.  There are many pros and cons, and you need to determine if you are benefitting or not, but one thing is certain  – if the Affordable Care Act is repealed as promised, there will be millions of Americans, many of them in our industry, who were willing to pay for coverage, losing insurance that they cannot otherwise afford.  You the taxpayer will pay for the uninsured indirectly, like it or not. It has always confused me as to why so many people hate the program since small businesses with under 50 employees were not required to offer health insurance benefits anyway – so again, the crystal ball shows no benefit to the average business owner from killing ACA.   One way or the other you will still pay.

• Less Regulation on Banks and Financial Services – Over regulation is bad. No regulation is worse. Remember the financial crash of 2008?  The argument is that regulation is preventing banks from lending to Main Street small businesses. Like I said in earlier articles, I started my first restaurant in 1973 and I can tell you that banks have NEVER been interested in lending to us.  They have always been risk averse and it is simply not profitable for them to originate loans of less than $250,000.  Even if all the regulators are exiled to third world countries do not expect many differences in bank lending.  They will continue to avoid sub-prime borrowers and still require collateral and personal guarantees. Alternative lenders will continue to grow as they have lighter regulatory burdens.

• Interest Rates, Inflation, Deficit and Recession – Fed Chairman Janet Yellin has made it clear that interest rates are going up because the economy appears to have recovered.  Unemployment is less than pre-recession levels; the stock market is at an all time high; GDP is up and the budget deficit is down even though most average Americans aren’t feeling so great about the “recovery”.  The big consideration will be the $6 Trillion in tax cuts plus the proposed $1 Trillion in infrastructure projects that will add to the deficit and national debt. Industry analysts are still predicting a restaurant recession in 2017 right into 2018.  Be prepared.

So the overview – even though it seems like major changes are afoot in Washington, we should not expect any real benefits in foodservice or restaurants. Will there be more customers spending more money?  It doesn’t look like it.  Will we have lower costs and lower taxes? Not unless you are rich or run a larger corporation. What do we do now?  What we always do – go back to work and keep pushing forward.  It’s what restaurant people do.

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David Sederholt
David Sederholt is a multi-discipline entrepreneur who has launched and built numerous companies in specialty finance, foodservice and commercial real estate over 40 years. After owning, financing and operating over a dozen restaurants in his career he found a niche in serving small businesses seeking financing and strategic advice. For 10 years he served as Chief Operating Office of Strategic Funding Source, Inc., (now called Kapitus). David has also been a Managing Partner at a boutique investment bank and a specialty commercial real estate firm. He is a regular guest lecturer and contributor to business and industry publications as well as serving as a Board member and advisor to numerous companies and non-profit organizations. He is currently owner of Ragnar Partners, LLC, a private investment and advisory firm.