See this article as it originally appeared in the Hartford Business Journal.
The onset of the pandemic left small business owners with more questions than answers.
But one answer that many agreed upon was that maybe it was time to sell. An uncertain future in terms of both pandemic duration and potential devaluation led to a hot mergers and acquisitions market beginning at the close of the second quarter in 2020.
Almost a year later, there are no signs of that momentum slowing down even with the economic recovery under way. A looming increase in the capital gains tax by the Biden administration may be another catalyst for sellers to move quickly.
But even though the current climate is considered a buyer’s market, the uptick in activity and plethora of buyers also make it a good time to sell.
Why is it the time to buy?
Business owners eyeing an early retirement may be more inclined to sell quickly with a reasonable valuation. Plus, if a small business held its own amid the storm of 2020, it shows resilience, and resilience means value.
Sellers who were able to pivot during the pandemic will certainly reap the benefits of that flexibility.
Conversely, buyers can potentially get a good price on companies with strong fundamentals that are poised for growth.
Sometimes that growth may be best realized in combination with buyers in the marketplace looking to acquire a business that rounds out their offerings, serves as a platform or fills a gap in their portfolio.
With so many ready sellers, there’s an opportunity to assemble a dream team that adds a new division, geography, product, service — or all of the above.
Why is it the time to sell?
Many organizations are in acquisition mode.
While a buyers’ market typically is not the ideal time to sell, a routine obstacle in selling a business is often the lack of qualified and interested buyers. The sheer volume of transactions means a business owner is more likely to find a buyer than at any other time in recent memory.
Some companies have become more valuable during the pandemic — think advanced manufacturing, infrastructure, mobile services and technology all the way to fitness equipment and anything that goes into setting up a home office. The microchip and semiconductor market is hot, primarily due to the work-from-home revolution and the continued development of mobile-enabled technology.
What do the numbers from 2020 mean?
While a good 2020 is a good thing, a bad 2020 isn’t necessarily a bad thing. How to treat the numbers from 2020 in determining a company’s valuation is a bit of an open question.
One option is to treat the financial performance of 2020 like any other year. Then there’s the opposite approach: Ignore 2020 completely and chalk it up as an anomaly we will never see again.
Some feel the numbers from last year still have to be taken into account to some extent, and an attempt at quantifying the impact of the pandemic is certainly a complicated task. This flexibility allows for both buyers and sellers to potentially steer the structure of the deal toward a more favorable outcome.
Will capital gains bring the pain?
The Biden administration’s American Families Plan contains a provision that would raise the capital gains tax from 20% to 39.6% on individuals with over $1 million in taxable income. Consider someone who has spent their life building a business to a $5 million valuation. Selling in a cash transaction with capital gains at 20% means a $1 million tax bill. Under the proposed plan, that tax bill doubles.
Do they hurry to sell before the end of the year and hope the new rule isn’t applied retroactively? Do they work four more years and see if potential new leadership in Washington reduces the capital gains rate?
It could go either way, but for now, this unusual market that is advantageous to both buyers and sellers continues.
