An increase in income tax rate means you'll pay a higher percentage of your income to the government. This directly reduces your disposable income, the money you have left after taxes for spending or saving. This can make it harder to afford basic necessities, save for retirement, or invest in your future.
Growing family companies need to be adequately capitalized to fund their current operating needs, future growth and development, and the periodic liquidity requirements of their shareholders. But after nearly two decades of historically low cost of capital and abundant capital market liquidity, family-owned businesses are finding that company capitalization decisions have become more complex in 2024.
There are many challenges. Amid the broader landscape, rate tightening by the Fed has increased the cost of borrowing in the range of 300 to more than 500 basis points for most businesses,1 the M2 money supply has contracted in a similar manner to what occurred during the Great Depression in the 1930s,2 and the biggest bond market rout in almost 250 years has occurred.
On the lending side, balance sheet asset risk exposure, stemming from commercial real estate loan write-downs and deposit withdrawals, has impacted bank liquidity, tightened credit acceptance and curtailed lending activities. In turn, many alternative lenders face challenges with existing portfolio companies.
Businesses are facing internal capital challenges as well. Inflation and other supply chain factors have impacted gross margins and operating income, capital budgets have been slashed in the B2B market, and cap rates for real estate valuations have deteriorated. The fear of recession has also limited capital market access for many businesses.
It’s clear that the rules of the game have shifted in today’s capital markets, so many family businesses are looking at how to re-evaluate their company capitalization plans. As part of that process, they need to better understand how the capital markets have changed, as well as how their business would be assessed by participants in the capital markets. In this way, they can better quantify their capital availability and more accurately calculate the cost of capital.
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