The pandemic-led market disruption will require many business owners to expend a lot of time and effort to restore, resize or even reinvent their business into order to stay competitive. That’s led some to wonder whether they want to go through that — especially those who may have just righted the ship after the difficulties presented by the Great Recession. And more practically, they may be wondering if they have the capital necessary to make that transformation.
Generally, however, valuations have gone up for those companies that have been able to weather the COVID storm. Buyers are increasingly knocking on owners’ doors, offering some pretty favorable deal terms. That creates the potential for a big year for those who work smart ahead of a sale process to put their business in the best light.
“The M&A world has gotten much more competitive on the buyer side,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “There are many more buyers out there than there ever have been and a lot of cash on the sidelines looking to get in on the action. Buyers are looking to invest in quality companies, and that gives sellers a lot of opportunity, and leverage, to negotiate a deal.”
Smart Business spoke with Altman about the 2021 M&A environment and why this year may (or may not) be a good year to sell a business.
How might taxes and other factors affect a sale decision this year?
There is a sense from some that there’s probably going to be some changes in the tax law in the near future. If the Biden Administration changes the capital gains rate at the highest bracket, that could affect those who are selling a business in a significant way, and that’s creating uncertainty. Sellers are able to get a very favorable capital gains treatment rate — a business sold today will often be impacted by a 20 percent tax burden. If the tax laws change in the way that some expect, the burden might be 39.6 percent. That difference is driving some owners to work to take advantage of the current tax rates to avoid what could become an additional 20 percent hit to their post-transaction gains.
There are also other factors weighing on the sale decision. Businesses are facing the possibility of a $15 an hour minimum wage, technology replacement costs, and investments to improve their digital presence. That might lead some to find a partner — possibly in the form of a financial buyer — to help offset those costs or lead a transformation.
There’s also the demographics to consider. Many business owners may be reaching a pivot point in their life where they’d rather take all or some of their chips off the table and either de-risk or move into their post-business life.
Who should not sell right now?
People who are still passionate about running their business probably shouldn’t sell. Also, companies that had an unfortunate drop in their valuation could now be in a position where the sale price is going to be affected by circumstances beyond owners’ control. In those cases, it’s likely better to weather the storm a little bit and not give up a loss in value that could be recuperated when conditions become more favorable.
What else should business owners consider ahead of a sale?
The decision to sell is both personal and opportunistic. But planning is key because there are steps any business owner can take to improve their company’s value.
Before reaching the point of fielding offers from potential buyers, business owners should get help from experienced M&A advisers who can make important improvements that better position the business for a sale. It’s too late once buyers have been engaged, and it’s far too late after letters of intent have been signed. Very simple changes could add substantial dollars to a business sale.
Any owner considering whether or not it makes sense to sell should engage good advisers to have that conversation and evaluate the opportunity as thoroughly as possible.
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