If you follow my blogs, you know that I typically dive into a particular topic that is on my mind. Today I am going to address three important topics, two that directly impact ARM professionals and one that is important to any owner who is thinking about selling his or her business. Buckle up because we are going to move quickly.
Let’s start with the unemployment rate. The good news is that the unemployment rate is consistently falling and falling at a faster pace than most economists predicted. But this is a mixed bag. Almost 500,000 new jobs were created in December and January alone. This rate should continue into February which is a positive sign. But job creation is not the primary factor driving the unemployment rate down, from 9.1% in August 2011 to 8.3% in January 2012. The rate is dropping primarily because fewer people are in the workforce looking for employment and this is likely not to change anytime soon. Consider that in January the labor force participation rate was 63.7%, the lowest in 30 years. In early 2008, at the start of the recession, the rate was 66%. Simply stated, if employment stays the same, a lower participation rate drives down the unemployment rate.
Don’t expect this to change soon as many unemployed Americans are discouraged and will remain out of the job race while others are entering retirement earlier than they might during a healthy economy. For recovery managers and ARM professionals who think that a reduction in the unemployment rate equates to liquidation improvements, think again. Until more people are employed through job creation, liquidation rates will continue to be negatively impacted.
Second topic, the U.S. Postal Service announced this week that it ended the first quarter of its 2012 fiscal year with a net loss of $3.3 billion. Wow! Someone will have to sell a lot more 1st class mail and ship a lot more boxes to make up that shortfall when in fact revenues dropped over 4% compared to a year earlier. Losses will continue to mount until the USPS rights its own ship by downsizing, restructuring and addressing its need to prefund retiree healthcare. Not a quick fix. Even if they are able to make some dramatic changes, which are highly unlikely, the USPS is competing with far greater forces including technology advances and electronic alternatives which continue to have a major impact on how most customers use the mail. Not third party collection professionals, however. Unlike most other businesses in the 21st century, collection agencies still have to rely on the phone and conventional mail to properly communicate with its customers (politically incorrectly referred to as debtors) because legislation has not been rewritten to affect the usage of email, text messaging and social media without risk of lawsuit. ARM professionals should expect increased postage costs with limited alternatives in the short term.
On the M&A front, a topic very near and dear to me, 2012 may very well be the end of 15% capital gains tax rates. According to a recent Forbes article (http://www.forbes.com/sites/beltway/2012/01/24/capital-gains-taxes-are-going-up/), the top tax rate on capital gains is scheduled to go up sharply from 15% today to 25% on January 1. Not that I want to be political, but the only way that the top capital gains tax rate remains at 15% will be if the tax cuts are extended for high-income taxpayers and the new health reform tax gets repealed. That’s a key distinction in this year’s presidential election so we will have to simply wait and see what happens. How many entrepreneurs do you know that take a ‘wait-and-see’ attitude toward anything in their business, let alone something as important as money in their pocket. Is now the right time to sell your business? For very self-serving reasons I would like to respond to everyone and say yes, call me. However, while tax impacts deal structure it does not drive pricing from a buyer’s perspective. Pricing is a direct product of a seller’s financial performance, customer base, service offerings and leadership team. It is sometimes impacted by a seller’s location, potential economies of scale and best practices. Pricing is, at best, indirectly impacted by tax implications.
We just covered a lot of ground. Do not hesitate to reach out to me confidentially if you want to discuss any of these topics in more detail. Also, if you’re attending Source Media in New Orleans next week let’s connect there. I look forward to speaking with you.