After the whirlwind that was the presidential campaigns, many franchisees are now trying to discern what the economy and business markets will look like over the next four years. In a recent webinar, our guests – Steve Blake, Managing Director at CBIZ, and Marc Chandler, Chief Market Strategist at Bannockburn Global Forex – spoke with First Franchise Capital’s Market Research Analyst, Matt Staninger, about coming trends in interest rates, taxes, and the mergers and acquisitions environment. Read on for some of their insights.
Donald Trump campaigned on a platform calling for tax cuts, tariffs, and immigration reform, along with a business climate favoring deregulation. He also signaled support for a more relaxed approach to antitrust issues.
If the incoming president is able to enact these broad policy aims – which is likely, considering the Republicans’ control of both the House and the Senate – the climate for business could be positive. Business taxes will tend to be lower, and mergers and acquisition (M&A) activity is likely to face less scrutiny than in past years.
A big question mark, however, is how tariffs would impact businesses. Pressure will be greatest on businesses that rely on imported products, such as seafood from Asia, out-of-season produce from South America, and various spices. But even restaurants that use primarily domestic ingredients, however, will be affected, as new equipment purchases may become more expensive if they are sourced outside the U.S.
If these tariffs are implemented, franchisees can expect to encounter disruptions in their supply chains and higher operating costs. It's important to note that even domestically produced goods may experience price increases if their components are sourced from abroad. To mitigate these costs, suppliers will likely explore alternative sourcing options. However, establishing new arrangements takes time and may not always proceed smoothly.
Franchise restaurant owners might need to raise prices, accept lower profits, or get creative to survive these import tariffs. This could mean things like using seasonal menus with locally sourced ingredients to cut costs.
The presidential election does not directly impact interest rates, as the Federal Reserve Board (the Fed) is independent of the government. As the Fed cut the Federal Funds Rate once before the election and once shortly after, questions are swirling over the likelihood and timing of additional cuts.
In December, the members of the Fed released their expectations for interest rate changes in the coming year. Their median expectation is for a total cut of 50 basis points over 2025. Currently, the federal funds rate (what banks charge each other, aka the “wholesale rate”) runs about 4.50%. The retail rate (what individuals and businesses pay) is close to 10%. As Marc Chandler stated in the webinar, “it’s a bit of the old trickle-down problem that you can cut the wholesale price, (but) it doesn’t really feed through to the retail sector for small businesses for quite some time.”
A major pillar of Trump’s proposed economic policies is making the provisions of the 2017 Tax Cut and Jobs Act (TCJA) permanent. If enacted, this would reverse the scheduled sundowning of TCJA and promote lower business and personal taxes. Trump has pushed hard for a return to the 100% bonus depreciation provision of the 2017 law. With this provision, business owners could deduct as expenses 100% of the cost of many big-ticket items in the year they were purchased, rather than having to amortize them over several years. This deduction would decrease a business’s tax liability in the year the purchase was made.
Trump has also called for reducing corporate income taxes from 21% to 20%, and has also signaled support for reducing the capital gains rate, although he has not provided a firm commitment on that issue.
The outlook for M&A activity in 2025 looks promising. Lower borrowing costs could give buyers more confidence to buy other franchisees or merge with them. Additionally, a reduced capital gains rate could spur some franchisees to sell, as it would provide a more favorable tax situation for them as they realize the appreciation of their business.
Both Steve Blake and Marc Chandler agreed that to succeed in today's business world, it's crucial to focus on your strengths and find advisors who can fill in the gaps in your knowledge. Blake added that it’s important to think more long-term than businesses have in the past. “Most businesses do a one-year budget, one-year projections, maybe three years at most for some businesses. We're recommending to a lot of our clients now to do a minimum of five years.”
Blake went on to say, “We've seen in the last five years such volatility, not only in the marketplace but in the regulations and in the tax code, that you really have to be looking out farther than one to three years. And you've got to be able to plan for what if something changes.”
Both agreed that planning for change and preparing for unexpected events is key, especially for low-probability, high-impact events like cybersecurity breaches, pandemics, terrorist attacks, and the like. They recommend frequent stress-testing of a business, running it through various scenarios and making recovery plans. As Chandler put it, “Businesses have to build into their DNA resiliency in a world which is dynamic, changing.”
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