July 30, 2012 | CNBC.com

A Tale of Two Middle Markets

4 min

How to Navigate the Best, and the Worst, of Times

We live in a time of extremes.  Uncertainty seems to greet us as at every step.  The economy appears to gather momentum, only to be thwarted by a recurring series of European crisis. Just when Europe seems to move off the brink, disappointing news emerges on Chinese growth.  Who thought we in the United States would have to lose sleep over whether Greeks are paying their taxes or the Chinese economy is growing fast enough.

The simple truth is that this is the new normal.  We live in a world which, by the design of American foreign policy since the end of World War II and many other less deliberate factors, has become inexorably inter-dependent.  What happens in Greece and Spain and Germany and China and Brazil all matter in the heartland of the United States. 

Meanwhile, our domestic circumstance amplifies the international uncertainty.  Our political system is broken.  A host of events conspire to create real challenges.  Enduring unemployment is a reality for millions of us. We have an aging population accustomed to unbridled medical spending paid for by others.  We waged a decade of expensive wars in distant places. Regulations are expanding in both scope and complexity. And, after years of cost-cutting, there is nothing left to cut.

In the midst of these challenges, there are sources of optimism.  Our trade deficit has shrunk from 6% to 4%.  Exports are up. Unemployment is inching down.  Savings are growing and the housing market is showing signs of life.  And money, yes money, the lifeblood of a growing economy, is cheap and plentiful; if you can get it.  In the midst of these mixed messages what is a middle market company to do to ensure that this is, as Dickens would say, “the spring of hope” and not “the season of Darkness.”

  1. Embrace uncertainty as an opportunity.  Entrepreneurs and the companies they run need to be nimble enough to turn changing fortunes into fortunes.  One needs to look no farther than the money flowing into health care to appreciate that times of change are times when innovative, hardworking people are able to prosper;
  2. Understand the ways in which the tax code is evolving and behave rationally.  The tax code is expected to change.  In some instances, the changes create incentives to make gifts to loved ones immediately.  In others, the changes could call into question basic corporate and deal structuring strategies that have been the norm for decades.  For example, if the delta between individual and corporate rates expands, should your mid-market business continue to be a pass-through entity for tax purposes?  Also, if passive investments attract even more unfavorable tax treatment, should you consider only investments involving active participation? Do not get paralyzed by the seeming complexity.  Just work at understanding and getting sound advice.  There are few areas where careful analysis can generate the level of returns that can be realized through tax planning.
  3. Move quickly on healthcare.  With the recent Supreme Court decision, the stage is set for a November showdown on the future direction of healthcare.  By January 1st, there should be a clear picture about what is likely to happen.  Do not wait; plan to be in a position to take whatever steps you wish to take immediately after November, regardless of your view of the Affordable Care Act.
  4. Get to the money.  The cost of capital is at all-time lows.  Securing access to such money to fuel expansion could pay dividends for decades.  So why, then, are so few companies accessing the capital.  In some cases it stems from uncertainty induced lack of confidence.  In other cases, the businesses seek the capital but it’s the lenders or investors who lack the confidence.  Rather than inviting paralysis, the complexity should drive the pursuit of capital so that businesses are in a position to react and set their own course.  There has never been a time when scale and depth have been more important.  Organizations need to be able to decipher the shifting landscape and set a course confidently and capital is an essential ingredient in that effort.

These four steps can be achieved through careful planning and coordinated effort.  A clear strategy regarding the direction of your middle market business will help senior management to identify and embrace the opportunities that arise.  Investing in sound tax and health care advice will pay immediate dividends as both of these complex and costly issues continue to evolve. And if you can get money under today’s terms, you should grab it and deploy it thoughtfully.  You might not see another opportunity like this.