As we approach the 2024 congressional and presidential elections, owners of lower middle market businesses in the tech-enabled outsourced business services sector must prepare for potential shifts in the business landscape. At CAS, we have identified several notable factors where the election outcome could significantly impact your business in 2025 and beyond. Below are the key considerations to help you make informed decisions about your company’s future.
Tax Policy
The outcome of the 2024 elections will have far-reaching implications for the broader M&A market, particularly for the lower middle market (i.e., deals under $500 million). Different administrations are likely to pursue divergent tax policies, which could greatly affect your decision to sell.
The current Democratic presidential nominee, Vice President Kamala Harris, has indicated that her administration would aim to increase the corporate income tax rate to 28% (up from the current 21%) and raise the top long-term capital gains tax rate to 28% (from 20%) for taxable income above $1 million. In contrast, the Republican nominee, former President Donald Trump, has signaled that his administration would seek to lower the corporate income tax rate to 15% for companies manufacturing in the U.S., with no changes to capital gains taxes.
If a Democratic administration takes office, it might be advantageous to sell now to avoid potential tax hikes that could reduce after-tax proceeds. Conversely, under a Republican administration, holding off on a sale might be more beneficial, as lower corporate tax rates and stable capital gains taxes could help maximize post-sale profits once new policies are implemented.
- Current tax situation: If a business is sold for a $10 million gain, the owner would pay 20% in long-term capital gains tax, resulting in $2 million in taxes. If the business continues operating with $2 million in taxable income, the corporate tax rate of 21% would result in $420,000 in annual corporate taxes.
- Democratic tax plan: Under a Democratic administration, the capital gains tax would increase to 28%, meaning the owner would pay $2.8 million on the $10 million gain. The higher corporate tax rate of 28% would result in $560,000 in annual corporate taxes on $2 million in taxable income. Compared to the current situation, the owner would pay $700,000 more in capital gains taxes and $140,000 more in annual corporate taxes.
- Republican tax plan: Under a Republican administration, capital gains taxes would remain at 20%, meaning the owner would pay $2 million on the $10 million gain. The corporate tax rate would drop to 15%, reducing corporate taxes to $300,000 annually on $2 million in taxable income. Compared to the current situation, capital gains taxes remain the same, but corporate taxes would decrease by $120,000 annually.
Please note, CAS is not a tax expert, and this information is not intended as tax advice. Tax rates and their impact can vary depending on each business’s specifics. The figures above are based on proposed tax plans that may change or never be implemented.
Regulatory Environment
The regulatory landscape can shift dramatically depending on the election outcome, affecting operational costs and compliance burdens. Under a Democratic administration, we could see increased oversight in areas such as financial services, healthcare, and technology. While this might lead to higher compliance costs, it could also create barriers to entry, benefiting established players. A Republican administration would likely focus on deregulation, aiming to reduce federal government power and oversight. This would likely lower compliance costs, as regulatory bodies support a pro-business agenda.
Regardless of the election results, data privacy and cybersecurity will remain key bipartisan concerns, given the rising number of security incidents. Businesses handling Personally Identifiable Information (PII) will likely face heightened regulatory scrutiny, as PII data is a prime target for cybercriminals. The expected rise in security incidents will drive further investment in IT security and cybersecurity insurance. Moreover, the rapid growth of Artificial Intelligence (AI) and Machine Learning (ML) solutions is likely to attract increased regulatory scrutiny. Potential new regulations could establish broad guidelines for the use of AI-enabled tools across industries.
Labor and Immigration Policies
Labor laws and immigration policies will significantly influence the availability and cost of human capital, especially for companies with a large number of hourly and high-turnover positions.
Under a Democratic administration, we may see a two-pronged approach. A push for a federal minimum wage increase, coupled with more relaxed immigration policies, could lead to higher labor costs but a larger domestic labor pool. This could fill gaps in less desirable jobs, reducing the need for outsourcing human capital to nearshore and offshore locations.
On the other hand, a Republican administration would likely pursue stricter immigration policies – a central theme of their campaign. A major overhaul in immigration policies would likely shrink the domestic labor pool, negatively affecting the labor market. The already limited supply of workers for demanding and repetitive hourly jobs could decrease further, creating upward pressure on labor costs. Faced with a worker shortage, many companies might turn to offshoring a portion of their workforce, seeking countries with more abundant labor supplies and considerably lower wages.
At CAS, we understand that navigating these potential changes can be challenging. Our experienced team is here to help you analyze how various election outcomes might impact your business and develop strategies to thrive in any regulatory environment.
Whether you are considering a sale or an acquisition or are focusing on organic growth, understanding the potential impact of the 2024 elections is crucial for making informed decisions. Contact us today to start a confidential conversation about positioning your business for success in 2025 and beyond.