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Why businesses are not expanding

By Amy McCullough

The Great Recession is technically over, but many Mississippi businesses faced with complying with new regulations regarding banking, healthcare, the environment and labor aren’t feeling much relief.

Regulatory uncertainty is the reason many businesses are afraid to expand. Even if access to credit wasn’t restricted due to new banking rules, many business owners say uncertainty over the financial implications of complying with Obamacare would still keep them in a holding pattern. Others complain one of their biggest problems is a lack of qualified labor due to Mississippi’s new E-verify law and the abundance of entitlement programs.

While most industries trend downward or flounder, at least one category — professional and business services — continues to improve. As regulations increase, more lawyers and financial professionals are needed to help business owners swim through the rising sea of red tape.

The Mississippi Business Journal interviewed industry professionals to get their take on the current economy.

Charlie Netterville, president of Woodville’s Netterville Lumber Company, said that while demand in the domestic market has been weak, he has had success expanding into the overseas market since forming a hardwoods export company with two other sawmills. Exports now represent 20 percent to more than 30 percent of his business.

Netterville would like to expand in Mississippi but can’t due to a lack of qualified workers. Founded in 1952, the company now has more than 100 employees. Workers start at $7.75 but can make up to $20.

“Since 2005-2006 all the way through now, it has been really tough as far as expansion goes. One of the most significant things is labor. When the governor passed the E-Verification law, he did away with a lot of the Hispanic workers. It’s hard to find an $8- to $10-an-hour worker who wants to work. He’d rather draw unemployment benefits. And we have a hard time finding quality workers who aren’t abusing some substances. We had to quit initial drug tests. Now we random test, and when we random test, they leave,” Netterville said. “The governmental regulations — the DEQ, EPA — all that is making it tougher for businesses to expand; to go through all the legalities of trying to get permits. It has gotten so out of hand it is almost impossible to do unless you’ve got really deep pockets. They will wear you out.”

Rick White, vice president of Metro Mechanical in Bolton, is waiting to see the financial impact of federal healthcare reform.

Under the new rules, businesses with more than 50 employees will be required to provide health insurance to employees or a pay fine. Employees would then be sent to state-mandated health care exchanges to buy their own insurance.

But if the price of health coverage rises, companies like Metro Mechanical, which has more 100 employees and already offers health benefits, may have to consider taking the penalty and canceling the company’s group plan.

“I have been talking to my insurance carrier, and our opinion today is we are concerned about what Obamacare is going to mean to us. But from a perspective of employment, our people believe that their health insurance is one of their most important benefits. I would be hesitant to cancel that — I feel such an allegiance to them. It will definitely affect our profit and our ability to be competitive in the marketplace. And it will restrict what we can do with other benefits, like pay increases, if it impacts me like I think it will. We hope not to send people to the (health) exchange,” White said.

John Batte III, president of Batte Furniture, which has operated at its current Jackson location since 1961, said higher taxes are the only certainty when looking into the economic future. Batte is a high-end furniture store with 30 employees, most of whom are full-time.

“We’re not planning any expansions right now. We are doing some small capital improvements. We just had our building painted. I would say the uncertainty is our concern, too. We just don’t know where we’re going to be in two years. The only thing we know for sure is taxes are going to be higher. The medical changes that are coming really put you in a state of limbo,” he said.

RJ Reed, who founded Reed Food Technology in Pearl, will not consider expanding now because of the unknowns and impending tax burden. Founded in 1995, Reed Food Technology now has 30 employees.

“If you’re a private business, small company or even a public company, to go out and expand typically requires some leverage, meaning going out and borrowing money. That’s pretty risky in this environment. Basically, if you’re in ‘business,’ which is a dirty word for a lot of people, you have to make a profit. If you don’t make a profit, you’re out of business. And then if you make a profit, the first person you have to pay is the tax man. The second person you have to pay is the bank.

“Technically, you’ve got to pay your employees and then maybe there’s a little bit left. So you’re fourth in line, at least, as far as getting paid. It would be a tough decision to go out and commit yourself to borrow money that you have to pay back. And you don’t know what that first guy who’s got to get paid – meaning the government – is going to do to you,” Reed said.

Jon C. Turner, a CPA and partner at Jackson’s BKD, LLP, said small businesses are in “wait and see mode.”

“Increasing federal regulations that are hitting the smaller banks and health care entities are burdensome, and are not only affecting those entities but trickling down to the many small businesses and individuals that they provide service to. Some changes were needed, but governmentally imposed regulations are turning out to be both invasive and expensive to small businesses at the end of the day,” he said.

Ed Wilmesherr, a partner at Ridgeland’s Butler Snow law firm, believes expansion of legal services will “continue for the indefinite future.” Wilmesherr spent 12 years in the legal department at Deposit Guaranty bank before joining Butler Snow, which provides services to a large number of regional and community banks, many of whom are worried about their fiscal future.

“I do think our clients fall into two categories. Some of our banks are overwhelmed by perception or the reality of the regulatory environment. Some banks are concerned, thinking this may be the time to sell or merge, and that may be driven by the cost of regulatory compliance. There are at least as many of the banks out there that see this as an opportunity — to acquire other banks, merge with other banks,” he said.

Wilmesherr said some bankers have told the firm their numbers are down because their loan-making ability has been hampered by unintended consequences of the Dodd-Frank Act, which was created to protect the borrower.

“Community banks that have typically been your institutions that would make consumer loans have found themselves less likely to make consumer loans because of the new regulations that apply to so many of those loans,” he said. “One example is residential mortgage loans that now have an escrow requirement. Some banks have found it prohibitively expensive or impossible to establish those kinds of escrow accounts. Some have stopped making residential loans.”


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About Amy McCullough