Federal and local government regulations have as much influence over Main Street businesses as they do Fortune 500 corporations. For small businesses in particular, changing laws not only impact profitability, but future sale outcomes as well.
A string of newly implemented and proposed U.S labor laws has small business owners contemplating what compliance will mean for them. Across the country, cities and states have successfully passed plans to increase their local minimum wages.
Last month, Los Angeles voted to raise its hourly minimum wage to $15 by 2020, joining a slate of other cities (including San Francisco and Seattle) that have enacted similar hikes. Specific chains such as Walmart and McDonald’s have responded with their own hourly wage increase initiatives.
Most recently, the White House issued a proposal that would expand the federal overtime pay threshold from workers earning $23,660 a year to $50,440, a move that would impact nearly 5 million workers (primarily those at the manager level.)
Understandably, small business owners have mixed feelings about these changes. According to a May 2015 survey conducted by the Wall Street Journal, 49 percent of owners support raising the $7.25 federal minimum wage, and 49 percent disagree. As is the case whenever regulations are in flux, it’s worth understanding both the positive and negative ramifications.
A strain on profits and potential value
Numerous advocacy groups and industry associations argue that small businesses don’t have the resource cushion to absorb higher labor costs without repercussions. National chains may be able to compensate by raising prices, but this would be a risky move for mom-and-pop shops that depend on customer loyalty.
The National Federation of Independent Businesses argues that the federal overtime proposal would lead to a reduction in weekly hours and benefits for small business managers. Some owners worry that a higher minimum wage will necessitate pay increases for more skilled personnel, making layoffs and hiring freezes the only ways to manage expenses.
Small businesses already operate on thin margins. A spike in wages could put pressure on owners to boost productivity in order to keep their business value intact. Owners planning to sell their companies in the short-term will need to prove that they can still be profitable--despite regulations--to attract buyers and healthy sale prices.
The case for a stronger workforce
Despite the perceived threat to internal expenses, many small business owners and advocates feel that the long-term effects of wage hikes and expanded overtime outweigh any upfront risk.
In a 2013 poll, the Small Business Majority found that two-thirds of owners believe a higher minimum wage would stimulate consumer spending and augment small business revenue. The more income hourly employees earn, the more spending flexibility they’re likely have; the hope is that workers will focus that spending on small businesses to strengthen their local economies.
Throughout the business and political spectrum, many argue that new and proposed labor laws will allow small businesses to build stronger workforces. Employees who receive better pay and benefits are often more inclined to stick around, saving small businesses the thousands of dollars it takes to replace and train just one worker.
Higher wages may also help small businesses attract more skilled, qualified candidates who can improve companies’ productivity and customer service capabilities. Small businesses with robust, talented staff will consistently lure potential buyers more than those with turnover problems and disengaged employees.
The recent minimum wage hikes and overtime proposal are only the first in what will probably be a series of U.S. labor law transformations. Rather than get caught up in knee-jerk reactions, small business owners should take a thorough approach to evaluating how regulatory change will impact their operations today, and their sale goals tomorrow.
Implementing certain response tactics, such as raising prices, may mitigate problems in the short-term, but jeopardize a company’s valuation over time. By understanding all sides of the issue, owners can comply with new rules in a way that supports their staff, their customers and their future sale.