Tax Headwinds: How to Protect Your Business Investment

I’m sure you’ve heard about one of the many new programs out this year, like the Affordable Care Act. If you’re like most of us, you don’t know what they mean yet. Well, let me rephrase that.

You know they mean less profit. What you don’t know is how much less…and I can’t answer that question for you. However, I have some ideas about how you can avoid losing wealth this year as a result of these programs.

Wealth and Business Performance

Let’s start with the concept of losing wealth. If you know about business value, you can skip ahead to “What to do?”

For most of us, the business we’ve built represents the single largest investment we will ever manage. And the value of that investment is determined by its performance.

Investors considering buying your business are, in most cases, seeking to purchase it to gain access to the stream of cash or profits that it produces. What they are willing to pay is determined by the amount of profit the business produces. If they can get a better stream of profits from a public company that pays dividends, for instance, they would just buy shares of that company instead.

When a program like the Affordable Care Act reduces your profit, this reduces the price an investor is willing to pay for the business, all things being equal. And this makes sense. Investors always have choices and if your business is negatively impacted, another business that isn’t impacted, or even an interest bearing investment, becomes a more attractive alternative.

What to do?

How to combat this problem is the question. And there are (at least) two answers.

First, you can mitigate the impact of the problem. Take the Affordable Care Act, for instance. By studying the impact of the choices available to you and carefully designing a plan, you can minimize the costs associated with complying with the law. While mitigation is certainly a good idea that can reduce the impact of the program, the outcome is not going to be zero impact in most cases. The impact, even after mitigation, will usually be increased costs.

The second approach is to make counterbalancing changes in the business to return profits to their previous levels. These changes can take the form of a cost index clause in contracts, elimination of price leaks, price increases on products or services that are truly unique, training for the sales team that increases effectiveness at selling on value, or a number of other areas where efficiencies can be gained. The trick here is to focus across the business to win back the profits being pulled out of another area.

So, while there are a variety of things you can try, this needs to be an urgent exercise. The Affordable Care Act and other programs are coming online this year, which means if you are on a calendar year end, you have just over three quarters to get the program in place and tuned to produce profit that will impact this year’s financials.

If responding to business environment headwinds is important to your business, join us Tues., April 30 for our Profitable Growth Seminar on tax headwinds and protecting your business.