Everyday I talk to business owners that are considering exiting their business but are concerned about the current recession and believe it might be better to wait rather than try to sell their business now. Although the economy might be a little slow right now, this can actually be an advantage for those considering a sale.
Supply and Demand
With massive corporate layoffs, there are more potential buyers right now. Displaced middle managers and executives tired of working for someone else are ready to buy and they come armed with 401K money for down payments and good credit for loans.
Low Interest Rates
Interest rates are at historic lows. Low interest rates mean that buyers can afford to pay more for a business. Whether it is a "sophisticated" buyer using discounted cash flow analysis, or someone calculating "how much can I afford a month" the same math holds true; lower interest rates mean lower debt service payments and higher cash flows from the business. Debt payment levels and cash flow drive value.
The Small Business Administration guarantees a portion of the loans that banks make. As part of the current stimulus package, the SBA has raised its loan guarantee level up to 90% for certain loans. At the same time, the SBA has eliminated the processing fees that borrowers normally have to pay. When buyers pay less for loans, they can pay more for the business.
Low Capital Tax Gains Rate
It is what you keep from a sale that really matters. At only 15%, capital gains tax rates are at the lowest levels in 30 years. Many people forget that in the late 70's the highest effective capital gains tax rate reached 49.875% and as recently as the early 1990's the highest capital gains tax rate was still at 29.2% . The current administration has already stated its desire to raise the capital gains tax rate so it is not a question of if but rather how much.
No one has a crystal ball, but what could happen if an owner waited until the economy starts to recover and things "improve" to pursue a sale...
As the economy begins to grow, corporations start hiring again, pulling potential buyers off the market and hence reducing demand. With the economy growing, the Federal Reserve starts to worry about inflation and raises interest rates to curb growth (yes, this is what they do). The SBA incentives will have expired, increasing loan fees and reducing bank guarantee rates.
A growing economy will potentially lead to less buyers in the market who will find loans that will cost more both in transaction fess and interest rates. With lower demand and lower values, owners who do sell will be lucky if capital gains rates have not increased to further erode their transaction value.
So, next time an owner asks you if it is a good time to sell, tell them "What are you waiting for?"
*About the author *
Greg Dupuis is President of Bridge Ventures, LLC, a middle market merger and acquisition advisory firm. He has completed over 200 transactions in his career. More information about Mr. Dupuis and his firm can be found at http://www.bridgeventuresllc.com/.