Jeff Thomas, CEO of Archetype Wealth Management, and Matt Gilbert, Principal of GaP Business Advisors, share how valuations are higher than they have ever been.
WHAT'S DRIVING THIS?
- A low tax environment returns on investment (interest rates and money flow) and the quality of your business at the time that you go to sell are the driving factors behind the higher valuations. The first two things you can't control, but the quality of your business you can, so fix things that may be broken, make your business transparent and make it an easy business to transact with. If you have all of these items and you put a great team on it who understands what type of buyer is going to pay the most for your company, you will have a great sale.
HOW HAS COVID-19 IMPACTED THE BUYING COMMUNITY?
- Most buyers are going in two different directions:
- Some are running to distressed assets; they are looking for a bargain-- something they can inject money into and nurse back to health over time and then flip.
- The other half of the community is running "flight to quality". They want to buy something that has the opportunity to continue to be really great in the future and is setup to blossom under their management.
- For the COVID-19 environment in the "flight to quality" community, those selling their business are going to get a "hall pass" for this COVID-19 performance period. A number of deals are going back to 2019 annual performance and setting the benchmark there for the valuation.
WHEN IT'S TIME TO SELL:
- Your biggest bill when you sell your company is your bill to Uncle Sam. The future tax environment will probably be much higher than the current environment, so you want to get out in such way that you pay the least amount of taxes. You can do this by planning ahead with your team: whether that's a pre-tax period, a stock sale instead of an asset sale (which is taxed more favorably to the seller), or maneuvering your entity over the next couple of years.
FOCUS ON THE RIGHT THING
- Don't focus on the number you sell your company for; focus on the number you keep when the deal is all done. This involves the right planning and a tedious negotiation with your buyer. There are assets in your business, there is cash, receivables, depreciation, all these things add up to what you get to keep and that's where you should direct your focus.
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[00:00:04] JEFF: Jeff Thomas here with Archetype Wealth Partners, my special guest today is Matt Gilbert from GaP Business Advisors. We were having a conversation recently about some different misperceptions in the marketplace, are valuations cheap? Are they expensive? How do you look at that?
[00:00:23] MATT GILBERT: Valuations are higher than they've ever been. We're in a really frothy valuation environment. And what that means is your company is more valuable in that environment than it is in a previous environment. And there are some things that drive that right. There's taxes. There's a return on investment, which is interest rates and money flow and those of things. Right. Then there's the quality of your business.
The first two you really can't control. The third, you can. The quality of your business at the time you go to sell, right. So let's fix things that are broken. Let's make it transparent. Let's make it a very easy business to transact with. Right. And then the fourth thing is your team, right. You get a good quality business, you get a good interest rate environment, you get a low tax environment and you put a great team on it. Who understands what type of buyer is going to pay the most for your company. You go out, you're going to have a great sale.
However, we haven't talked about covid effect on this environment. You know, for most of the buyers that I talked to, I talk to buyers every week. They're running in two different directions. A good portion of those buying community people are running to distressed assets. They're looking for a bargain, something then they can inject money into and nursed back to health over the next couple of years and flip it like people flip a house. Right. And we don't really deal with those folks. The other half of the community, they're running right to quality. Yeah, right. They really want to know that they're buying something that has the opportunity to really continue to be great in the future.
And it's kind of set up to blossom under their management. So for the COVID-19 environment in the flight to quality community, they're going to get a hall pass for this covid performance period. You know, right now we're in a number of deals and we're going back to twenty nineteen annual performance and setting a benchmark there for the valuation. Right. And so then the future period, they're going to get a hall pass for covid. And we look out in the future and we go, OK, well, what's going to affect the market coming forward? And I think there's you know, there's always a surprise, right? There's always politics and those make those make buyers nervous.
But the thing that's in your control is what tax environment you sell your business in. And I really believe that the future tax environment is going to be much higher than the current tax environment. And so you want to get out. That's going to be your biggest bill when you sell your company. Is the bill to Uncle Sam, right? So you want to get out in such a way that you pay the the least amount of taxes, whether that's a pre-tax period, whether that's a stock sale instead of an asset sale, which is taxed more favorably to the seller, or whether that is maybe maneuvering your entity over the next few years to be a taxed advantage sale. And that takes a lot of planning with somebody like you and us to pull off.
[00:03:25] JEFF: So what I'm hearing is valuations are pretty high now. We've talked to some of our previous conversations about low interest rates and a lot of liquidity out there driving prices up. Who knows how long they last. But even in this covid period, they're pretty darn good. They are considering history. And it's hard to imagine when we're handing out this much money as a government that somebody's going to pay for it. So I don't think tax rates are probably going down significantly over the coming year or so might be actually a decent environment to still be here.
[00:03:59] MATT GILBERT: Here's the other thing is, is most of our clients, I hate to say so on camera and do it anyway. They focus on the wrong thing. Right. It's not the number that you sell your company for. It's the number you keep when the deal's all done right. And so that requires a lot of planning. It requires a very tedious negotiation with your buyer. Right? There's assets in your business. There's cash, there's receivables, there's depreciation. If you're in construction, there's retaining all these things add up to what do you get to keep? And that's really what people should be focused on.
[00:04:34] JEFF: Well said. Matt, thanks so much for being here. I appreciate it.
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