Our Experts Weigh in on 2021 Business Predictions and Forecasts
The Business Advisory panel is produced by the L.A. Times Brand Publishing team in conjunction with Greenberg Glusker LLP, Objective Capital Partners, RSM and Wolf, Rifkin, Shapiro, Schulman & Rabkin LLP.
The business landscape in 2020 was faced with more challenges than perhaps ever before. Social unrest, the economic climate and the COVID-19 pandemic forced companies to assess and in many cases make changes to the way they do business and how they approach their relationships with customers, clients and employees. With much change in the air for 2021 – from the distribution of vaccines to the arrival of a new administration – it’s harder than ever to know what’s coming next and how businesses in virtually all industries should prepare for the months ahead. This roundtable discussion is designed to provide unique insights into business strategies for 2021. How permanent are the big changes and trends of 2020? What new or altered regulations will change the way we run our operations? What safeguards should businesses be putting into place moving forward? For answers, we turned to some of the region’s most trusted advisors and experts, who graciously weighed in for a discussion and shared predictions and forecasts of what to expect.
Q: What advice would you give your clients for the coming year?
Matt Oster, Partner and Department Head (Litigation and Dispute Resolution), WRSS&R: I believe that flexibility will continue to be the watchword in 2021. Although we are hopeful that the current lockdowns will ease by spring, that outcome is far from guaranteed and current restrictive conditions could persist. At the same time, it is possible vaccination campaigns will become wildly successful and the economy will come roaring back to life. Either way, businesses that have maintained flexibility (by, among other things, retaining talent, reserving cash, avoiding obligations etc.) will be best poised to weather difficult times and capitalize on opportunities that may arise.
Wendy Lane, Employment Law Group Chair and Partner, Greenberg Glusker LLP: California employment law liability risks are lurking everywhere. As of Jan. 1, 2021, California employers with five or more employees must remember to comply with the newly amended California Family Rights Act (CFRA), which previously only applied to employers with 50 or more employees, to provide up to 12 weeks of family and medical leave. Because CFRA is now broader than federal law, it could also entitle employees to take more than 12 weeks of leave in certain situations when an employee qualifies for different kinds of leave under state and federal law. The best way for employers to stay current on changing laws, such as the expansion of CFRA, is to update their handbooks annually. The cost of consulting with counsel is far less than the risk of liabilities for failure to comply with changing laws.
Channing Hamlet, Managing Director, Objective Capital Partners: While most companies have been positively or negatively impacted by COVID, for businesses that have remained relatively stable, the market for mergers and acquisitions is as strong as it has ever been over the past decade. Transaction activity in California dipped significantly in Q2 and Q3 of 2020; but in Q4 the number of transactions completed was greater than any quarter over the past three years. This robust transaction market is in large part driven by a low interest rate environment where institutional investors are seeking investment returns through alternative and private investment. Private equity funding has increased more than 500% over the past decade, creating strong demand for attractive companies. As a result, our advice is that business owners seeking to exit over the next several years may want to accelerate their plans to take advantage of the strong market now.
“Our advice relates to both being cautious about investment and preserving cash as well as looking at how to leverage capabilities to pivot in their market where there are new opportunities.”
Q: What major financial changes do you foresee from our new administration in Washington?
Kevin Depew, Deputy Chief Economist, RSM: While narrow majorities for Democrats in both the House and Senate will likely keep the most aggressive regulatory changes at bay, there will be some key differences to watch out for - among them a greater scrutiny of how banks are protecting and promoting consumer well-being as well as how they are trying to reach the unbanked population in the U.S. Another key change will likely be increased oversight by the SEC and an even greater emphasis on ESG priorities.
Q: What types of businesses will thrive during 2021?
Hamlet: There are a number of sectors that are expected to thrive in 2021 as a result of economic policy and changes driven by the pandemic. Key trends include increased government spending, an accelerated shift to eCommerce, changing demographics of the office to work from home, changing behavior around public health, the drive for increased automation and efficiency and changing consumer preferences around entertainment. The number of sectors that have opportunity is too large to mention. However, the sectors that have the greatest opportunity for growth will be B2B services (in particular, technology-enabled services), SaaS providers (in particular, easy to implement and low-cost solutions) and eCommerce.
Q: What market risks do you foresee for 2021 and how do you suggest clients mitigate them?
Oster: While COVID-19 risks are the ones everyone seems to want to discuss, I believe that clients also must consider the more mundane risks associated with the recovery we all are hoping for (whether that recovery follows a V, U, K, W, or even L shape). For example, cutting too much talent can leave a business unprepared for the possibility of a quick recovery (V shape), while burning cash and creating liabilities can leave a business unable to weather a slow recovery (U shape) or a double-dip recession (W shape). The possibility of a multi-track or uneven recovery (K shape) creates even more complication for businesses. Sophisticated legal and business advice can go a long way to mitigate these risks by providing clients an understanding of their options, the trends in their industries and where the pitfalls lie.
Hamlet: One of the primary issues our clients are facing relates to developing accurate forecasts, as well as planning and understanding the “normal” level of revenue and profits. For businesses that have been impacted negatively by COVID, our advice relates to both being cautious about investment and preserving cash as well as looking at how to leverage capabilities to pivot in their market where there are new opportunities. A number of our clients were able to replace lost revenue with new opportunities, whether it relates to supporting research, municipal infrastructure, the shift from office to home, or increased utilization of protective equipment. For businesses that have benefited positively from COVID, our advice relates to understanding how the environment will change as COVID normalizes as well as finding ways to take advantage of newfound success, whether it’s raising capital on attractive terms or approaching new markets.
Depew: The obvious negative risks are further waves of the pandemic, possible vaccine shortages or failures and now escalating political violence. There are some significant upside risks, however, that are possibly obscured for business owners and management by the overwhelming nature of the pandemic. Unlike the slow recovery from the Great Recession, there are no structural impediments. U.S. households have more than $1 trillion in excess savings. The economy today is only running at about 80% capacity and the risk for businesses is that they are unprepared for the potential of the pandemic subsiding more quickly than expected. RSM’s forecast for second quarter GDP is 8.7%. Our fear is some businesses may find themselves playing catch-up, unable to meet this pent-up demand.
Q: What recent legislative changes do you think businesses need to be most aware of as they move forward in 2021?
Hamlet: There are a number of legislative changes that should have a positive impact: increasing government spending to drive infrastructure improvements, additional economic relief that will drive both consumer and business spending and a continued low interest rate environment spurring investment and growth. There are also a number of areas to be concerned about related to increased taxes and further California regulations related to employment or other areas that may reduce business flexibility. Overall, there are a number of legislative tailwinds that we expect to continue to drive economic growth. We are very optimistic about what 2021 has in store for business owners and the M&A market.
Q: How has AB 5 and subsequent AB 2257 legislation affected hiring practices in California? How can companies avoid risk?
Lane: The “ABC” test, codified by AB 5, has led many companies to reclassify workers as employees because they are unable to establish prong “B,” which prohibits independent contractor classification if the hiring company cannot establish the worker is performing work tasks that are outside the usual course of the hiring company’s business activities. However, converting contractors to employees carries numerous potential costs for hiring companies, including but not limited to providing paid sick leave, obtaining worker’s compensation, paying for overtime, providing meal and rest periods (or paying premiums for failure to comply), and overseeing detailed timekeeping practices and payroll compliance. As a result, I have seen an increase in California companies hiring remote workers located in states or countries where the requirements for independent contractor classification are less onerous.
Oster: Many employers have an unexamined preference to classify certain workers as independent contractors (that same preference is shared by many workers). AB 5 and the case law that preceded it have prompted many employers to investigate this preference and seriously consider whether they truly benefit from the independent contractor classifications they thought they needed. For example, these decisions can impact workers’ compensation coverage, access to group health benefits, intellectual property ownership and competition issues. Although AB 2257 and Proposition 22 have eased some of this pressure in certain industries, this re-examination is a healthy exercise that every independent contractor-dependent business should invite.
Q: How will new California labor laws, such as SB 1159, which expands workers’ comp coverage, and other COVID-19-related rulings affect businesses?
Lane: Under SB 1159, which applies to events after July 6, 2020, workers who suffer COVID-19-related illnesses or death are entitled to workers’ compensation insurance benefits if (1) the employee tests positive for COVID-19 within 14 days after working at the employer’s direction at the employee’s “specific place of employment” and (2) the employee’s positive test occurred during a period of an “outbreak” at the “specific place of employment” (as defined by statute). Although employers now bear a higher burden with respect to COVID- 19-related claims, it is too soon to assess the economic impact on employers. We do not know if high rates of unemployment and telecommuting could reduce infection risk at worksites, reducing the number of COVID- 19-related claims. Employers can take some comfort in the fact that California’s Insurance Commissioner rejected the WCIRB’s request for a COVID-19 surcharge on all employers in 2021.
Q: What are some new COVID-19 reporting obligations for California employers?
Oster: Labor Code section 6409.6 creates a new and very onerous reporting obligation when an employer receives notice of a potential exposure to COVID-19 in the workplace. Among other requirements, employers must notify employees, union representatives, and employers of subcontracted employees in writing within one business day following notice. The notice must be delivered in English and the language that a majority of the workforce understands, provide employees with information regarding COVID-19 benefits, and notify employees of the disinfection and safety plan that the employer plans to implement. Noncompliance can lead to penalties. This leaves very little time to identify who must receive the notice, draft it, and distribute it. As a result, we strongly recommend that all California employers maintain a form of notice ready for use and designate a person responsible for ensuring these requirements are met.
Q: What are the legal ramifications of companies asking employees to receive vaccines?
Lane: Employers may certainly encourage COVID-19 vaccinations. However, the EEOC has made clear that any policies and practices must still comply with the Americans with Disabilities Act (ADA), Title VII of the Civil Rights Act of 1964 (Title VII) and any other applicable laws. Employers must still engage in the interactive process regarding employee requests for accommodation of disabilities or religious beliefs. Each case will be uniquely fact-specific and require balancing the rights of the individual employee against state and federal requirements that employers protect the health and safety of the entire workforce. Unfortunately, this may lead to very difficult decisions for the employer and create a new basis for litigation at a time when the number of employment litigation cases is already on the rise.
There will be some key differences to watch out for - among them a greater scrutiny of how banks are protecting and promoting consumer well-being as well as how they are trying to reach the unbanked population.”
Oster: I see very little risk in asking employees to get vaccinated. By making it a job issue, employers may assume the cost of the vaccination and may need to treat the vaccination time as working time but the risk of asking pretty much stops there. The risk lies in how employers ask and what employers do if an employee declines. Mandatory vaccination policies and adverse employment actions (such as reducing or eliminating work hours or taking away work assignments) based on violations of those policies can lead to failure to accommodate and discrimination claims. Thus, I have no problem if an employer wants to “ask,” but I strongly recommend that they make it clear that they will reasonably accommodate employees who have legitimate reasons why they do not want to be or cannot be vaccinated.
Q: How do businesses recover financially from our “winter of discontent” after additional pandemic related closures?
Depew: The pandemic has exposed our K-shaped economy that has its origins in the mid to late 1990s. Participants in the economy who are on the upper K path, dominated by businesses in the digitalization ecosystem, may not have even noticed demand shortfalls related to the pandemic. In some cases, businesses in that ecosystem have even thrived as a result of the pandemic. Businesses on the lower K path, however, have both limited maneuverability and fewer options for recovery. Small businesses have been particularly devastated by the pandemic and fiscal aid has, so far, fallen woefully short for them and monetary policy tools are not very effective in providing targeted relief. Our hope is policymakers take steps to address this shortfall in the coming quarter.
Q: What security issues do companies and consumers face in this increasingly cyber-dependent world? What strategies do you recommend for data sharing and cybersecurity?
Lane: Many companies raced to establish remote IT operations when the pandemic required large numbers of employees to suddenly work remotely. In the rush, many employers likely neglected certain essential security protocols. Employers should update their policies to document acceptable remote access, provide protocols for device security, and protect sensitive data (restricting access as required). Companies should also warn employees about the risks of phishing, which is a cyber-attack that uses email to gain access to employee devices and company systems for malicious purposes. Such an attack can cripple a company and prevent the entire workforce from working remotely. Employers can also send employees phishing tests to heighten awareness. Employers should also instruct employees how to secure personal wireless networks to protect against unauthorized access to sensitive information.
Employers can take some comfort in the fact that California’s Insurance Commissioner rejected the WCIRB’s request for a COVID-19 surcharge on all employers in 2021.”
Depew: In our increasingly connected world everyone has some degree of data and cybersecurity risk. We’ve now learned that more than 250 government agencies and an unknown number of corporations are believed to have been affected by a broad hacking intrusion likely perpetrated by Russian state actors. Businesses and individuals now need to think about their overall risk profile, including risk related to third parties, and develop an approach to minimize the impact if a breach happens to them. It is critical to understand what data each partner has and what that risk translates into for the business.
Q: What are the factors driving the M&A market?
Hamlet: Due to the culmination of multiple factors, we expect that this coming year will be an extraordinary year for sellers in particular. There is a supply and demand imbalance between attractive deals available for sale and large amounts of capital ready to be deployed by buyers. As previously mentioned, deal flow was down slightly as a whole last year even with the record-breaking Q4 of 2020. However, capital availability through private equity and strategic buyers is the highest it has ever been, increasing more than five times over the past decade. Since we are currently in a period of slower economic expansion, acquirers of all types are looking to deploy capital into strategic acquisitions that will drive growth and profitability. Fortunately for the business owners and sellers, this all leads to an extremely high demand for attractive deals that have growth potential and meet certain criteria.
Q: What major developments do you foresee for U.S. trade policy? How will this impact relations with China?
Depew: The first development, though largely cosmetic, is mending what has become an antagonistic relationship with our most important trading partners, Canada and Mexico. Relationships with the EU and UK have also deteriorated. With respect to China, if tariffs were designed to reduce the goods deficit, then data show that strategy has failed. The U.S. trade deficit with China hit a record $287 billion in the 11 months to November. If we are generous and assume tariffs were designed to exert pressure on China to address forced technology transfer, IP theft or even human rights issues, then they have clearly failed there as well. There is broad bipartisan support for addressing these issues. Doing it via the trade channel, however, is akin to using a hammer to kill a gnat on your hand. Trade wars can be started with a tweet. Ending them is another matter.
“Businesses that have maintained flexibility will be best poised to weather difficult times.”
Q: How can businesses improve their financial literacy?
A: Hamlet: We frequently work with business owners who desire to sell their companies, but are not truly prepared from a business and accounting standpoint. As a result, they leave money on the table when they sell, often significant amounts. To truly maximize value in a sale, companies need to follow GAAP (Generally Accepted Accounting Principles) and utilize accrual basis rather than cash accounting for their financial reporting. Without this, it is very difficult to sell a company to an institutional buyer since they will require this level of reporting for their own purposes. The first step in terms of improving financial literacy is to hire an accountant or CPA to prepare financial statements on an accrual/GAAP basis and do formal reviews monthly. The next step is preparing and managing budgets/forecasts which increases discipline and brings greater awareness of the true drivers of business success.