Want to take the pulse of the dealer community regarding economic policies that impact them the most? Well, perhaps the best source to leverage is a consultant who works with dealers on a daily basis.
For this, we turned to Jim Kahrs, founder and president of Prosperity Plus Management Consulting of Smithtown, New York. Kahrs works with members of the dealer community to bolster revenue and profitability while working toward achieving their goals. He offers a value builder program that consists of eight drivers to help dealers maximize their business value, and a business analysis platform to help identify and provide a roadmap for goal achievement. Plus, he has represented more than 200 sellers in M&A transactions, ensuring dealers get maximum return on their investments. Kahrs has also established a marketing continuity program to help dealers navigate the pandemic business environment and ensure long-term viability.
Pandemic Centric
With Election Day looming in less than a month, Kahrs provided some perspective on the fears, interests and motivations at hand that are occupying dealer minds under the current circumstances. These issues are similar to ones from past economic downturns, but simultaneously unique due to the open-ended nature of a pandemic that seemingly has no expiration date.
Unlike past election cycles, the dealer emphasis is less on the ramifications of a change in administration and more focused on the pandemic’s business reach moving forward. Taxation, trade and regulation—the traditional outline points of a Republican versus Democrat proposition—have been overshadowed by the pandemic, economic relief packages, unemployment and restarting the economy.
“If you think back to the 2008 election, when it was becoming pretty clear that Barack Obama was going to win the election, there was so much talk about what the impact was going to be on business with the change of administration,” Kahrs noted. “Right now, there’s so much else going on with businesses trying to function and keep their heads above water, figuring out how they’re responding to this whole COVID-19 situation. There hasn’t been a tremendous amount of talk regarding what’s going to happen depending on what direction the election goes.”
One area of interest continues to be economic stimulus packages. When the Senate convened following its August recess, Republicans were still seeking to get enough votes to pass a “skinny” COVID-19 relief bill that would include an extension of the Paycheck Protection Program (PPP) and enhanced unemployment benefits, among other things.
After Congress failed to reach an agreement on a stimulus package heading into the recess, President Trump signed four executive orders, among them an extension of the federal unemployment supplement (the CARES Act) at a rate of up to $400 per week, and a payroll tax holiday through the balance of 2020 for Americans earning under $100,000. The fine print of the orders, and legal questions surrounding forcing states to cover 25% of the supplement, had many observers scratching their heads.
“We’re trying to decode and decipher that for dealers, because there’s so much information in all of this and so many different pieces of the regulations, that it’s important that they understand it,” Kahrs said. “Most folks don’t have the time to study it the way they need to. No one I know has figured out all of the mechanics of it yet, and no one knows if Congress will put together a package.”
Capital gains tax is one area of significant interest for dealers. Democratic nominee Joe Biden’s plan to support his health care plan would be funded, in part, by increasing the top marginal income tax rate on long-term capital gains to 39.6% for taxpayers earning more than $1 million annually. It would also eliminate a tax expenditure, the step-up in basis that enables decedents to pass capital gains taxes to heirs without tax.
Fish or Cut Bait
“One thing that COVID has done is shift priorities for a lot of dealers, especially baby boomers who are going to be looking for an exit strategy at some point in the very near future,” Kahrs said. “This pandemic probably has a lot of owners thinking this decision should be sooner rather than later. Tax changes, especially around capital gains, could have a significant impact one way or another. Whether (the rate) stays where it is, goes up or down, depends on which administration is in control.
“The Biden tax plan would have a significant impact on most dealers looking to sell their business. Under the plan, many would be taxed at a rate of 39.6% instead of the current 20%. This near-doubling of the taxes could change the landscape of acquisitions and how they are approached. Smaller dealerships could potentially minimize the impact by spreading out the payments they receive, but larger dealerships wouldn’t have that option.”
This adds another variable into the mix for M&A activity. According to the RealClearPolitics poll average, Vice President Biden held nearly a seven-point advantage as of Sept. 6, though President Trump clearly defied polling trends in the 2016 election. But if the Democratic challenger holds serve on Election Day, it could trigger an avalanche of activity through the balance of the year, fast-tracking deals that are already in the pipeline before President-elect Biden would have the opportunity to effect his tax changes.
The combination of people shifting priorities and the thought that there could be some tax changes might step up the timeframe and increase some M&A activity
– Jim Kahrs , Prosperity Plus Management
Still, Kahrs notes a change in the tax code may not become a reality until 2022, which could fuel a bevy of deals from participants looking to maximize their gains in the interim. “The combination of people shifting priorities and the thought that there could be some tax changes might step up the timeframe and increase some M&A activity. For now, I have a feeling that M&A activity is going to take a bit of a break while everybody figures out what’s going on.”
Should President Trump garner re-election, Kahrs believes any changes that foster more activity could open the door for private equity companies to become more aggressive. “If the economy gets kicked back into gear, interest rates stay low and money is readily available—in other words, the tax structure still favors these types of activities—I think we’ll see M&A pick back up and maybe increase more than before.”
COVID-19, as opposed to the threat of business-altering conditions offered in a change of presidential administrations, has placed a greater drag on dealers’ willingness to invest in diversifications such as managed print or managed IT. Temperature-scanning kiosks/systems have been the safer play for dealers, and Kahrs has one client that offers a solution that can be incorporated into an HVAC system in order to clean and sanitize the air more effectively. This is the type of low-hanging fruit that can provide what he sees as a temporary boost. A more long-term play for dealers, in his estimation, is identification/access control systems that speak to the needs of security, as physical tools complement cybersecurity solutions.
While the presidential race garners much of the mind space in this election cycle, it is worth noting that majorities in both chambers of Congress are up for grabs next month. Health care continues to be a hot-button issue from a cost standpoint. Should Dems control both chambers but President Trump keeps his perch in the Oval Office, or Biden gets elected accompanied by a chamber split, enacting health care legislation that gets signed by the president could be a long-shot proposition.
Flowing Funds
President Obama’s cornerstone Affordable Care Act has significantly altered the health care benefits landscape, particularly for smaller dealers, according to Kahrs. “The bigger dealers figured out how to handle it, but there are a lot of smaller dealers that have basically stopped offering health care—they couldn’t afford to compete and couldn’t afford to pay for the constantly rising rates,” he said. “If it gets (more expensive), will larger dealers start to back away from it? It’s become a huge piece of the expense puzzle for every dealer, much bigger than it ever was.”
As an aside, one of the developments to continue in light of the PPP is the availability of money to borrow. Kahrs points out that banks “are making a fortune” from processing the loans, with the majority of them carrying a 5% fee and 1% interest—not exactly lucrative, but the high volume of loans processed certainly adds up.
“(The banks) have zero worry of default, because it’s all backed by the government,” he said. “So it’s going to translate into more money for the banks to lend. That might help the dealers looking to invest for acquisitions, expanding operations and taking on different product offerings.”
