This cliché may never be so important as it is today when it comes to taking money out of your business, whether you continue to lead it or take a full exit. Here is the landscape as we see it at Transact Capital.
As an investment bank and M&A firm, we are seeing an unusual amount of owners approaching us to sell their company “before the end of 2021”. Some want to exit completely; others want to continue running it but take money out now at a low capital gains rate while it exists.
You can do either if you move quickly, but we believe the window is rapidly closing. Based on our research and experience, here is what Transact Capital sees ahead of us:
- The capital gains tax rate is almost certain to increase, sometime over the next 12 months.
- The effective date is unknown, but many believe it will be the beginning of 2022.
- Increased rate from 20% to 25% or 28%; or possibly a phase-in to a much higher level.
- The expected cap gains tax hike is not the only cause of the exodus in 2021. Other possible reasons:
- Owners realizing that they need to be larger or have more capital to weather future storms like the one we just endured.
- Taking advantage of historically high price multiples, driven by cheap money chasing higher investment returns than the stock market and bond yields, on a risk-adjusted basis.
- Unwinding the backlog that existed from Covid 2020 is contributing to expanded earnings, making owners see more value in their business, whether real or not.
- Prior to COVID, the demand for acquisitions was high, but mostly for “high quality” companies. Today, it may not be “what you own”, but what it’s worth to someone else in a consolidation.
- The 2021 opportunity may quickly close towards the middle of the summer, as major tailwinds may disappear.
- We believe there will be an onslaught of deals trying to get closed by the end of the year.
- Investment banks, attorneys, accountants and others will be overwhelmed to get all these deals done, and potential clients may be put off until 2022.
- When/if the tax hike is announced this year, it may be too late to begin a sale process.
- Potential buyers may defer new acquisitions in order to get their current deals closed.
- When you are priced, 2020 results may not important; you will be sold on 2021 performance, but be careful:
- In some situations, a large spike upward over 2020 may be due to the COVID business backlog, and owners will be fooled into thinking it justifies an unusually high multiple.
- Owners must prove that the high 2021 numbers are sustainable in future years; or that technology and re-positioning will support future high growth.
- If that is not enough, discussions around increased corporate or personal high-income tax rates only expands the value gap of selling in 2021 prior to these increases, reducing owners’ future dividends.
In summary, we believe the market is red hot for sellers as dollars continue to chase deal opportunities. Some of this will continue into 2022, but the after-tax advantages to sellers will surely decline.
If you are considering taking cash out of your business in the near-term, please don’t wait until late summer. The backlog is building quickly. Average time to get a deal closed from the start of an engagement is 5 – 8 months, in normal times. If you want to just hedge your bet and remain in some control of your business, there are deal structures that allow that. See article “Two Bites of an Apple” here.
Written By: Steve Zacharias, Managing Partner at Transact Capital. Please contact Transact Capital if you would like to meet or zoom to discuss this topic further. All communication would be held in strict confidence and with absolutely no cost or obligation. 804.612.7102.
Note: The above reflects the views of the author and may differ from other experts and public opinion. The statements are based on research and news commentary along with experiences within Transact Capital as a firm.