Who’s Picking Up the Tab?

When a small business is sold, the total price of the business includes not only the cash paid, but any obligations assumed by the buyer on behalf of the seller. Transfer of a loan balance, accrued vacation pay for employees or continued employment for the former owner are all considered part of the purchase price.

The calculation of Earnings Before Interest and Taxes (EBIT) presumes that debt financing is a choice. An owner can reinvest profits, or share the risks of the business with a financial institution in return for an interest rate. No sane buyer would merely assume debt without considering it in the cost of acquisition.

In a long essay on government last week, The Economist said “Many democracies now face a fight between past and future, between inherited entitlements and future investment.” In my posts on the issues surrounding Baby Boomer retirement, I frequently receive angry comments from the succeeding generations about the debt and entitlement burdens that they are inheriting from the Boomers.

The Greatest Generation and the Silent Generation used the voting booth to develop a social safety net for Americans. The Boomers’ first President was Bill Clinton; elected long after these Great Society programs were entrenched. For the last 40 years, the taxes collected from the largest and most productive generation in history paid benefits for those who preceded them.

A business can fund growth by reinvesting profits or borrowing more. Increasing debt is easy if revenue and profits are expanding. Only when the growth curve levels off does rising debt become a threat.

Piggy bank timeGrowth in the US GDP is leveling off, just as the country needs to find massive amounts of working capital to meet its rising social obligations to the Boomers. Political candidates who put it on the front burner are guaranteed to be unelectable. Nonetheless,  a bill is coming due that will easily consume the nation’s cash flow, and which could eclipse all other spending needs.

When a business struggles to pay its debts, it has to either raise revenues or reduce expenses. As new generations become the majority, they will have to choose between taxing themselves or reducing their obligations to the Boomers.

 

 Hunting in a Farmer’s World: Celebrating the Mind of an  Entrepreneur, is an ownership book, not a management book. “John Dini’s writing is crisp, peppered with good data and concise, pointed stories, revealing how deeply he knows the head, heart and guts of entrepreneurs.” (Read more reviews)

Categories: Economic Trends, Exit Planning, John's Opinions, Politics and Regulation, Selling a business, Strategy and Planning... Bookmark this post.

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