While many business owners are concerned that they won’t get top dollar for their business after a tumultuous year, there are three strong factors that may actually make this the best year to sell your business and grow your wealth.
You CAN Get a Lucrative Offer (Even if This Wasn’t Your Best Year)
I remember just over a year ago when the pandemic first surfaced. This event was fairly unprecedented – and business owners were clouded by chaos and uncertainty. Most didn’t know if their business would survive, let alone thrive, with new restrictions and shutdowns throwing curve balls on a regular basis.
We’ve come a long way and most of us have learned to adjust to a new sort of normal. In fact, businesses that had contingency plans in place proved themselves to be pandemic proof and have reaped the rewards through lucrative deals. The demand for these businesses has been great and there is an abundance of capital available for thriving businesses.
But what if you struggled throughout the pandemic? Is all hope lost when it comes to selling your business? Is this the wrong time to sell?
Three Factors That Can Impact Your Timing
Here are three considerations for selling your business in 2021:
- The proposed capital gains tax increase. We at Legacy Partners, do not believe it will pass at President Biden’s current proposal of 39.6% (including the NIIT of 3.8% we are talking a whopping 43.4% tax), but we do believe it will go up. Of course, this tax will only impact “the wealthy.” Guess what – you as a privately held business owner will be wealthy when you sell your business! There are still many unknowns, but the writing is on the wall. Taxes are going up and they are targeting you. Never before has tax mitigation been so important. There are many strategies that can be deployed to reduce your tax obligation upon sale but recognizing that timing is now the most important factor is critical. If your business is well-positioned there has never been a better time to go to market and realize your return on investment before the IRS takes an even bigger bite out of your deal.
- Did you outperform pre-pandemic earnings during the pandemic? This is a heavily weighted factor that makes you attractive to buyers and influences what your business is worth. You may be able to get the highest possible price for your business right now. As a business owner, it is imperative that you can answer the question, “What is my business worth?” with a degree of certainty throughout all of the different stages of your business’s life cycle. If the value of your business can fulfill your business and financial goals this is the perfect time to execute your exit strategy. Interest rates are still low, inflation, while perking up, is still at bay, there is a lot of dry powder available to get deals done. To take advantage of current market conditions you must have a strategy and it begins with understanding the value of your company from a mergers & acquisitions point of view. If you can’t answer this question, feel free to reach out to me for help.
- Did you maintain pre-pandemic earnings or slip a little? Having challenges during the pandemic doesn’t necessarily mean your business is unattractive to buyers. Investors look at trends and if your business was strong prior to the shut down a decrease in revenue last year does not take you out of the game. Forward projections for growth supported by a strong backlog make your business attractive through the eyes of a buyer. The basics always hold – strong proforma financial statements and valuable intangible assets drive value; and we are seeing unprecedented premiums being paid for our client’s businesses. The time is now – and we don’t know how long this will last.
In A World of Uncertainty, Legacy Partners Offers Clarity
For the past several months, investors are exceedingly active in purchasing middle market businesses, but some business owners have been hesitant to sell, still unsettled from the shaky ground of the pandemic. Those who take action succeed and there is still time to get your business sold in 2021. When we get into 2022, all bets are off as to increased taxes, labor shortages (don’t even get me started on our labor market), global tensions, etc. Will the devastation in India take our global economy down? It could!
Don’t stick your head in the sand. If you have a business that could potentially attract an investor the time is now to go to market. But, to do it successfully you need a plan. And that plan needs to be comprehensive. You will need to know what your business is worth from an M&A perspective, any gaps in your value, so you can optimize your business to ensure you are successful when you go to market. You need to understand the impact of selling your business on your personal finances. Can you fund your retirement if you sell your business? You will only know if you have an income replacement gap if you have a proper financial analysis performed and a plan created. And, after you sell your business, you will need to know how to mitigate the taxes to protect your wealth.