For many companies, 2011 can be categorized as a transitional year. Business owners finally appeared to be settling in and getting comfortable with the “new normal” that has presented itself after years of unpredictability and turmoil resulting from a wavering economy. We have found that the inertia that was taking a strong hold on many business owners began to lift and there were many strategic acquirers in the market, as companies continue to recognize the advantage of growing through acquisition versus the difficult task of doing so organically. Ultimately, there is a large pool of buyers poised to invest and well funded to do so. In the same light many businesses have made the necessary adjustments and are positioned to be more profitable and thus more marketable to potential acquirers.
Throughout the year we publish various articles geared towards educating owners on the complex process of selling a business. It is always important for us to stress time and again that selling a business is as much of a lifestyle decision as it is a financial decision. Each new year marks a time to reflect on milestones, successes, and shortcomings of the past year, assess your current standing, and plan for new goals and decisions to be made in the year ahead. If selling your business is something you are including in your plans for 2012, the following are some points that could have an impact on your timing and the decision to sell your company in the coming year.
The outlook for 2012 is strong, as 2011 was a solid year for many small businesses. Business owners that have been thinking about selling their businesses for the past few years have had to put these plans on hold as the economy hit many businesses hard. This forced many to closely examine their operations to reduce expenses and increase efficiencies. “Cutting the fat” as well as the current revenue upswing that many businesses are experiencing will more than likely translate into an ability to achieve an increased valuation in 2012.
It may be time for a change in lifestyle. Waiting causes uncertainty. Business owners who had to shift into survival mode may now be presented with a good opportunity to cash out at a favorable valuation and move on with their lifestyle goals. We are currently working with a client who is kicking himself for not accepting a $7 million offer to sell his company 4 years ago. With the changing economic and industry conditions, he is hopeful of achieving a transaction that is less than one-half of what he would have received in previous years in order to exit the business and move on to the next stage in his life.
Acquirers have cash to invest in private companies. It remains a “seller’s market” for private companies that have performed reasonably well over the past few years. As previously stated, businesses are finding it tougher to grow organically and are recognizing the opportunity to grow by way of an acquisition strategy. Both corporate buyers and private equity groups are sitting on significant amounts of cash that they are looking to deploy through strategic acquisitions. These buyers are well funded and not reliant on bank financing, as traditional lenders are still very conservative with financing M&A transactions. For smaller transactions, however, SBA financing sources have become more aggressive in recent periods.
Expiration of the Bush-era tax cuts. If you are thinking about selling your business, it is important to be aware of the status of pending changes in federal capital gains tax rates. The expiration of the Bush-era tax cuts could have a significant impact on the after-tax proceeds of a business that is sold after 2012. The tax cuts enacted in 2001 and 2003 reduced the capital gains tax rate from 20% to 15%. Although they were extended, they are now set to expire on December 31, 2012 and revert back to 20%. In addition, a new tax of 3.8% will be layered on top of the 20% capital gains rate for taxpayers with income over $250,000. This alone is not a reason to pursue the sale of a business; however, it is a factor to consider if you have been giving thought to a transaction.
Sun Mergers & Acquisitions can help you assess your options in regards to valuation, deal structure, and marketability of your company so you can make a more informed decision about your future plans in 2012 and beyond. We would welcome exploring your exit strategy options, realistic valuation and deal structure and exit strategy preparation.