Small Businesses on the Block

If you missed it on May 27, check out an excellent New York Times article on how the current economy is affecting sales of small businesses.

The entire article – titled “Small Business on the Discount” – should be read, but a few points are worth highlighting here:

• To all the usual reasons that small businesses are put up for sale — personal problems and personnel squabbles among them — add economic woes this year. But even as for-sale listings rise around the country, so is buyer interest… The problem, though, for owners seeking to sell their businesses is that prices appear to be softening — a reflection of a variety of causes, among them tighter credit markets, rising costs and fewer customers.

• Retirement, illness, divorce, death — and simple burnout — still drive the majority of owners to sell, but in the rocky economy, some otherwise solid businesses are now having a hard time. Their owners decide they cannot hold out for better times, so they sell for less, business brokers say.

• In a survey by the International Business Brokers Association of its 2,000 members, nearly 73 percent predicted that 2008 would be a buyer’s market. The survey was released in January.
Cress S. Diglio Sr., the association’s chairman and president of Corporate Investment International, which is based in Orlando, Fla., said that “this year the number of sellers will easily outpace the number of qualified buyers.” One reason is that a crucial small business financing tool, home equity lines of credit, has been drying up as house values fall. Traditionally, small businesses have had a hard time obtaining commercial credit, and that is worsened in rough economic times, several brokers said. “A year ago, people were using home equity loans,” Mr. Hottes said. “And now they are drawing down their 401(k)s.”

• [A]n unpleasant truth is that many, if not most, businesses do not sell. For decades, the conventional wisdom was that brokers sold about one out of five businesses they listed. But a new study by Louis O. Vescio, owner of Sunbelt Business Brokers in Melbourne, Fla., found that the percentage was only 10.5 percent.

Congress Urged to Get Back on Productive Tax Track

The Jobs and Growth Reconciliation Tax Act of 2003 was signed into law by President Bush five years ago on May 28, 2003. This anniversary of sorts might be a good time for Congress to look at the powerful economic results of the package, and focus on getting back to small business friendly tax relief to help get the economy moving again.

In a media release noting the anniversary, SBE Council chief economist Raymond J. Keating said: "The 2003 tax cut really was key to getting the U.S. economy moving. We were experiencing a sluggish recovery coming out of the 2001 recession, and the benefits of the 2001 tax cut were too far off in the future. The pro-growth aspects of the 2003 tax relief package - namely, lower personal income, capital gains and dividend tax rates, along with expanded expensing for small business capital expenditures - were immediate and gave a jolt to investment and economic growth."

According to Keating, the tax cuts have helped the economy weather the housing and energy storms far better than we otherwise would have. But now, as Congress talks up tax hikes, and the threat looms that taxes will be increased considerably in 2011 (or perhaps earlier) additional negatives are being piled on the economy.

Small businesses and consumers are hurting right now. There is great unease about the economy, and where it is headed. Unfortunately, Congress has done nothing lately that might improve matters, but instead, federal lawmakers seem intent on making things worse.

For example, there is the general push for higher taxes. In addition to higher taxes on energy, it is very clear that a majority in this Congress favor allowing most of the 2001 and 2003 tax relief measures to expire at the end of 2010. That looming tax increase -- the largest in history -- is a major restraint on small business investment and growth.

“That's not good for the economy," said SBE Council President & CEO Karen Kerrigan.

Kerrigan added: "It's time to get back to what works on the tax front. It is not higher taxes. Instead, it's about productive tax relief. The 2003 tax relief package, signed into law five years ago today, was on target, except for being temporary. Congress needs to get back on the right tax track by making the pro-growth aspects of the 2001 and 2003 tax cuts permanent, and then building on that with fundamental tax reform."

Expanding Economic Opportunity Through Free Trade

Last week, SBE Council released a new report titled “Trade, the Economy and Small Business.” It lays out the following:

• the basic economics on free trade,

• how the U.S. economy benefits from trade,

• the problems with protectionism,

• how NAFTA has boosted the U.S. economy,

• the increasing importance of trade to small business, and vise versa,

• and finally, a pro-trade, pro-growth agenda, including why it makes sense to pass the pending trade deals with Colombia, Panama and South Korea.

It also is worth noting a few points made in a fact sheet release by the White House on March 23 highlighting some positives regarding the deals with Colombia, Panama and South Korea:

• Approval and implementation of the U.S.-Colombia free trade agreement would eliminate tariffs on goods produced by several of the companies attending today's event, including:

- Case New Holland, a world leader in the manufacturing of agricultural and construction equipment, whose Fargo, North Dakota, plant exported about 48 percent of its production in 2007. The Case IH tractor faces a $15,500 tariff from Colombia.
- Cannondale Bicycle Corporation’s bicycles face a 20 percent tariff.
- Harley Davidson’s union-made Ultra Classic Electra Glide motorcycle, which faces a 20 percent tariff.
- Mack Truck’s Mack Granite Cement Mixer, which faces a tariff of 15 percent.
- John Deere’s Iowa-manufactured round baler, which faces a 10 percent tariff.

• The free trade agreement with Panama will increase U.S. access to one of the fastest-growing economies in Central America and support a key democratic partner. In 2007, Panama and the United States exchanged more than $4 billion worth of goods – nearly twice as much as just four years ago. The U.S.-Panama free trade agreement will build on this vibrant trade relationship by immediately eliminating tariffs on 88 percent of U.S. industrial and consumer goods exported to Panama and on more than 60 percent of U.S. agricultural exports.

• The free trade agreement with South Korea (KORUS FTA) has the potential to boost annual U.S. exports by more than $10 billion while cementing ties with a vital ally. The U.S. International Trade Commission estimates the reduction of Korean tariffs and tariff-rate quota provisions on goods market access alone would add $10-12 billion to annual U.S. GDP. South Korea is our seventh-largest trading partner and the KORUS FTA is the most economically significant FTA that the United States has signed in 15 years. The KORUS FTA will further open a growing market of 49 million consumers to the full range of U.S. goods and services. South Korea has a vibrant and rapidly growing economy and is located at the crossroads of world's most dynamic economic region.

Gloomy Consumers

The Conference Board has added another piece of data confirming that consumers are a gloomy bunch regarding the economy.

As MarketWatch.com reported: “U.S. consumer confidence extended its tumble in May to reach a 16-year-low, the Conference Board reported Tuesday, as inflation expectations reached a record high on rising gas prices.”

Keep in mind that policymakers – that is, our elected officials and their appointees – have played central roles in our current economic doldrums. For example, regarding the impact of gas prices, government moratoriums on energy exploration and development under federal lands and offshore are real negatives in terms of supply and costs.

Also, Federal Reserve monetary policy has failed to keep inflation and inflation expectations under control. That means higher oil prices, due to both a falling value of the dollar jacking up the dollar price of oil, and the fact that oil serves as a hedge against inflation.

These inflation problems also create uncertainty that restrains private sector investment.

All of this adds up to slow economic growth – perhaps a recession – with added inflation risks. Hence, gloomy consumers.