Regulations – Can You Manage What’s Coming?

By Maurie Cashman

I had a routine appointment with my doctor today. He had recently moved his practice and there was a noticeable change in the process and atmosphere. Gone were ALL of the nurses and employees I have known for years. I made a comment about “entering the matrix” and got a frustrated reaction.

Regulations had driven him to sell his practice to a huge local medical network. While we agreed that it was probably best for him, I asked him what ultimately drove the decision and he immediately responded “regulations.”

As we talked more he told me he had seen three leaders of major regional enterprises in the same industry this week who were all considering early retirement due to the inability to function with increasing federal and state regulation. Three, in one week, from one industry!

Today, there are 3,348 federal regulations in the pipeline, with nearly 1/3 impacting small business directly. (Source: The Office of Information and Regulatory Affairs, Unified Agenda 2013).

According to the NFIB Small Business Optimism Index, small business owners have cited regulations as a top impediment to conducting business for over 65 months in a row. (Source: NFIB Small Business Optimism Index)

There is no doubt that this regulatory burden has a much larger impact on small and medium businesses. I managed a business in an industry massive regulations and regulation that was rapidly changing. We experienced an environment in which the regulations changed three times in eighteen months in Oklahoma in our industry and there was no relief granted by grandfathering to protect massive investments that had already been made. We had the resources to devote legal, engineering, financial, monitoring processes, human resources and systems to exceed the regulations. Smaller businesses cannot possibly match these resources over the long term, unless they form relationships and alliances that allow access to these resources on a cost-effective basis.

The proposed regulations are designed to touch every area of business. Some are already baked into the cake and the government cannot support itself without them. Some are non-governmental regulations that are imposed by industry upon itself. Here are a couple of examples.

Regulation

The federal government is looking hard right now at labor issues. A few of the areas they are looking at are overtime pay for salaried workers, the status of Independent Contractors as employees and the minimum wage. That is only three of myriads. Do you have a plan for what you would do with your business if you had to track salaried workers hours and pay them time-and-a half for OT? What if those Independent Contractors you use are suddenly classified as employees, eligible for all of the benefits you pay to your workers, and maybe yourself? Can you manage a $15/hr. minimum wage, which, by the way can be enacted by the federal, state, county or municipal government on their own?

De-Regulation

All good things must come to an end. What happens when the government decides to save some money by backing off of a regulation?

The Renewable Fuels Standard was implemented to subsidize and protect the ethanol industry during its formation. Now it is not only not being increased but may be reduced. The result is lower corn prices and falling land prices. What happens next? Major new oil fields are found and Saudi Arabia decides to drive out ethanol as an alternative fuel by pumping their fields dry. Farm values fall but rent lags. Inputs have been set at rates to support high corn production and won’t be reducing any time soon. Farmers stop buying machinery and pickups. Small towns suffer. Farmers start losing money and want property tax relief. Schools can’t survive a cut in funding, which comes from property taxes. School districts lose students as parents are forced into ever-growing cities to find work. Districts consolidate and towns disappear.

So what will be the result? Larger government will generate more regulation. More regulation will demand more taxation (of all forms) to support regulations. Companies will have to devote increasing resources to meet regulations. Larger companies will be necessary to meet the scale of larger government. Larger companies will be formed via the consolidation of smaller companies at discounted values. The loss of smaller companies will drive consolidation of schools, health-care, municipalities, banks, and on and on. Only the large will survive in partnership with the government. Sound like anyplace you know?

Too Big to Fail is being institutionalized. It will not stop. The government is driving it. We the People have baked it into the cake. We cannot get rid of the bureaucratic class without driving up the unemployment rate and the deficit since they all have severance packages, unemployment, and lifetime pensions and health care.

If regulation (and regulatory uncertainty) is currently the most important problem facing business today and with a massive amount of new regulations coming, do you have the people, processes, systems and resources that will be required to meet this onslaught of regulation? The answer to this question could have a tremendous impact on the value of your business when you wish to transition ownership and may even impact your ability to make that transition.

How will you manage it?