Matt Gilbert
June 26, 2020
Listen up! Your “feelings” on the situation will not serve you well here, trust me. In times where uncertainty reigns and the entire business ecosystem is disjointed and out of whack, you need to let data guide you. Stay with me for a minute…
Think about the travel restrictions, retail shutdowns, political riots and how every city, county, and state seem to be making up their own rules as they go. Why on earth would a business owner dare move forward with M&A activity in these crazy times?
For starters, historical data shows that companies with a well-documented strategic plan, strong balance sheet, and seasoned leadership make more acquisitions in uncertain times. Wait. What? Yep, facts are facts. If you want to sell your business and are kicking yourself for not doing it during the last few years when valuations were at all-time, historical highs, it’s actually not too late. Buyers are still out there, and with near-zero percent interest rates, they may want to acquire your business now. But hear me, it’s almost too late. If this resonates, keep reading.
Data also suggests that the optimum M&A window will be a short one. Think of it like this. Right now:
So if everyone is thinking all of that right now, do you really want to be part of the herd, or do you want to rise above and be the one they’ll all be envious of? This is a FANTASTIC time to sell your business!
I could rattle off a list of the reasons why, but here is a glimpse into one of the major variables. What affects the “funds you clear” more than anything else when you sell your company? Taxes! And with all the effects from stimulus payments, job losses, and government bailouts that have taken place so far – and those that are still to come in the fallout, what do you think will happen to your taxes? More than likely, they will rise – and perhaps significantly. For example, under the Carter Administration, the sale of a business was taxed at more than 70%! Let that sink in. Current tax rates are the lowest we have seen in our lifetimes and probably the lowest they will ever be in our lifetimes (in my opinion). Make no mistake – your taxes are going way up in the future! So even if you hold out now and massively grow your business to sell later, you may still “clear less money in your pocket,” depending on how the sale is taxed.
And speaking of taxes, they currently provide an incentive for the buyer now, too. The Trump administration has a TEMPORARY program allowing accelerated depreciation of assets purchased. Smart buyers know that acquiring before that program expires will give them an accelerated return on investment.
There’s no doubt that things are complicated and scary right now, which is why you need to align yourself with an experienced sell-side transaction advisor who will listen to your goals and put them forth as their goals for success. Even though times are tricky and even though lenders and appraisers and the other disciplines required to get a sale across the finish line are working from home or in limited capacity, deals ARE getting done. In fact, we just closed a sale where the buyer was in South Carolina, the seller was in Texas, the legal team was in Georgia, and the lender was in the midst of an enormous merger. Due diligence was performed during the height of COVID quarantining. That posed several unprecedented challenges, but we got it done, and it was a great sale!
My advice to all business owners is to get an opinion of market value – now! Then determine if the value of your business – in today’s tax environment – would provide a sale outcome you would accept and weigh this against the risk of remaining in business. Make your decisions from a place of fact-based understanding rather than from “feelings” about your business, the marketplace, etc. I recommend this because I believe we’re only a few years away from falling valuations, harder to access funds, and rising taxes. You don’t want to be in the herd rushing to exit when it’s too late.
Don’t trust your CPA’s “opinion” of your company’s market value. Their job is to minimize your tax liability, and they don’t typically have a constant ear to the market. Don’t trust your attorney’s “opinion” of your company’s market value. Their job is to reduce your business risk, and they also don’t typically have a constant ear to the market. “Industry experts,” trade show and webinar speakers, brothers-in-law, and bankers all have an “opinion,” too. But these “opinions” aren’t grounded in the facts as they pertain to YOUR business.
Be wise and get a forward-looking, comp-driven, adjusted-EBITDA-based, opinion of market value from a firm that does this for a living. They’ll know how to apply discounted cash flow and quality of earnings analytics to the business case that considers employees, vendors, customers, IT, IP, safety, real estate, and all other important variables.
About GaP Business Advisors
Gilbert & Pardue Business Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A) and through business value-growth services such as Fractional CFO, Advisory Board, Executive Coaching, and Consulting.
Matt Gilbert and Bret Pardue established GaP to provide owners of businesses generally enjoying annual revenue of $5-$75 million with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly-experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.
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