The pandemic has had a huge impact on virtually every business in the world. This has caused many business owners that are approaching retirement to hold off on selling their companies, but a closer look at market conditions reveals it is a “Sellers’ Market,” and business owners should consider taking advantage of that “conundrum”. Interest rates are at record lows which allows buyers to pay more for companies, there are more buyers than sellers which is driving up prices in many industries, and it is an election year with a business-friendly President that may not be around for a second term. Of course, if the pandemic has had a significant negative impact on your business, we generally recommend waiting until conditions have returned to normal before selling. But for those businesses that are performing reasonably well during these unusual times, below are four industry conditions that favor selling at this time:
- Potential Increase in Capital Gains: If Joe Biden is elected, he has indicated that he will raise the capital gains tax rate for income over $1 million to the ordinary income tax rate. That change would increase the capital gains rate for most business owners from 20% to 37%, an 85% increase! It may require a Democratically controlled Senate and House to get the increase passed, but that should not be ruled out in your planning. With the risk of an 85% increase in taxes, we recommend that any business owner that is considering selling in the next few years evaluate whether he or she should start the process now.
- Numerous Buyers: The huge growth in the number of private equity groups together with record corporate profits have led to a significant increase in business buyers that have record levels of cash to deploy. Private equity and venture capital funds currently have an estimated $1.5 trillion dollars to invest. Further, this large number of buyers has not diminished with the pandemic, resulting in buyers competing to buy good companies that are for sale and driving up prices.
- Fewer Companies for Sale During Pandemic: The pandemic has caused many business owners to pull their companies off the market or hold off on going to market while the number of buyers has generally held steady or increased. This has led to a “Seller’s Market” with more buyers than sellers and has resulted in buyers aggressively competing to buy companies.
- Low Interest Rates: Low mortgage rates are driving up housing prices and the same condition is occurring in the market to buy a business. Strategic buyers and leveraged equity buyers can borrow at a very attractive rates which means they can afford to pay more for an acquisition. As mentioned above, Buyers are having trouble finding good companies to buy and are having to substantially increase their initial bids in order to beat out the competition for well positioned companies.
The first step in deciding on whether to sell your business is getting an independent valuation of your business. Please contact us at Transact Capital to get a complimentary estimate of your company’s value.
The next step is hiring a qualified investment banker that has expertise in your industry. Transact Capital has been representing business owners in the sale of their business for 20+ years and uses a disciplined process designed to identify the best buyers and have them compete to purchase your company. Please reach out to us to learn more about our industry expertise and our disciplined process.
Written by Jim Sowers