Part 3: Making Sense of 2020: How Are Private Businesses Coping with the Current Economy?

This is the third in a six-part series in which we explore the implications of the current economic, market and political environment with a (virtual) roundtable of Brown Brothers Harriman subject matter experts from the fields of economics, investing, business strategy and wealth and tax planning.

Today, we’ll be speaking to Ben Persofsky, Executive Director of BBH’s Center for Family Business.

Scott Clemons: Ben, you spend a lot of time with our clients who own and manage private businesses. How is the private sector dealing with this unique set of challenges?

Ben Persofsky: There are many similarities to the experiences of public companies. In the early days of the pandemic, most of the businesses we work with suffered a clifflike drop in demand, with the exception of those companies providing mission-critical services, such as retail food processing and distribution. The retail sales statistics that you and Tom discussed demonstrate a wide range between the winners and the losers, and we’ve seen those same dynamics play out in the private sector.

SC: Are there common themes across this wide range of experiences?

BP: Yes. One challenge that every company faced, and is still facing, is worker safety. In the early days of the pandemic, it wasn’t entirely clear how COVID-19 was transmitted, and it was difficult to obtain necessary protection equipment, such as N-95 masks and plexiglass. It’s better now, but companies have to remain vigilant as infection rates are rising in parts of the country. A second common theme, which Suzanne touched on, is supply chain management. Disruption to global supply chains got a lot of attention, but domestic supply chains were disrupted as well.

SC: How helpful were the various aspects of the CARES Act?

BP: It was critical economic life support for many companies. Indeed, most of the details of the CARES Act were specifically targeted toward smaller employers. As is the case with any large government program, there were challenges in implementing things like the PPP, and smaller companies scrambled to compile the necessary information to apply to the program. However, the program generally worked. It enabled companies to retain employees while providing a much-welcomed financial cushion that allowed companies time and resources to adapt to these new challenges. One of the reasons I love working with private companies is that the creativity and innovation in the middle market is inspiring. Necessity really is the mother of invention, and we’re seeing a lot of invention this year.

SC: And how helpful has the Federal Reserve been in lowering interest rates?

P: All else being equal, lower interest rates are better. Falling interest rates don’t turn bad strategic decisions into good ones, but a lower cost of capital may serve to accelerate strategic investments that are fundamentally sound on their own merits. It is important to note, however, that a 0% fed funds rate doesn’t translate into free money for businesses.

SC: What does the mergers and acquisitions (M&A) market look like given the combination of economic challenges, low interest rates and the potential for tax code changes?

BP: M&A activity stopped on a dime in the second quarter, as you would expect given the sharp downturn in financial markets and unprecedented economic uncertainty. Having said this, we’ve been impressed by how quickly activity has bounced back in the third quarter, driven partly by a revival of transactions that were put on hold in the spring, but also, as you note, by a drop in interest rates.

SC: Are you expecting a surge in M&A activity in the fourth quarter?

P: It wouldn’t surprise us, and it would be in keeping with what we’ve seen in the fourth quarters of previous election years. But it’s not a one-decision question. There are some businesses that would benefit from a Biden presidency, for whom the prospect of a transaction might be delayed in anticipation of better earnings growth in the next few years. Of course, higher capital gains taxes would argue for a transaction to be completed in 2020, in case a Biden administration raises taxes retroactively to the beginning of 2021. As with most implications of changes in tax law, the fact pattern differs from company to company.

SC: I notice that you characterize this as both a risk and an opportunity.

BP: Of course. Biden has committed to raising corporate taxes and reversing the broad deregulatory trend, and these prospects might accelerate a strategic effort or transaction that is already underway. At the same time, changes in regulations might benefit some companies over others. Don’t get me wrong, the prospect of any change is a management challenge, but well-managed companies often find ways to turn these changes into competitive advantages.

This article was edited from the original for clarity. Read the full article here.

Next Up Tomorrow: Senior Wealth Planner Ross Bruch and Senior Tax Advisor Joe Fuschetto on the tax implications of this election.

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