Selling a Business in 2021
Selling a business in 2021 means selling a business with the Covid-19 pandemic as a backdrop. How that backdrop impacts a business’ “sell-ability” depends on two main considerations: the industry the business is in and the size of the business.
As I write these words, lock-down restrictions are being lifted in certain areas of the world and some economies are beginning to open up. So, what do the pros – M&A professionals and the people that provide funding for business acquisitions – think about the M&A market for the near term?
Not surprisingly, most mention those two main considerations – industry and size – when discussing the short-range prospects of sellers.
The travel and entertainment industry, in general, has been clobbered. For example, many single-unit restaurants and small restaurant chains have struggled mightily to stay afloat. But the owners of many such establishments have reinvented or resized their business in order to stay alive.
And, with the support provided by emergency government programs, sympathetic landlords, vendors offering generous terms and help from The Bank of Friends and Family, many of these will emerge intact.
Aside from the stomach-turning stress and anxiety of the past year, when the time comes to sell – and it will – the most likely lasting effect will be the aberration of a monstrously hideous P&L for 2020. For professional business brokers, this strongly suggests that we would be wise to provide buyers with FIVE years of financial information about the businesses we represent, rather than three which has generally been the custom.
But another consideration when selling a business – and arguably the most important – is what the buying market looks like.
What’s Driving Demand
Since early 2017 – and up until early 2020 – many of the posts on this blog have been about the high, sometimes frenetic level of activity in our industry. The Silver Tsunami – the Baby Boomer Business Sell Off – has been a theme often discussed.
The amount of money looking for acquisition opportunities has been another.
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The emergence of small private equity groups and family offices aggressively trolling in the Lower Middle Market has been a third.
Realistically, none of this has changed.
Yes, for the first few months of the Covid outbreak, everyone seemed to hold their breath waiting to see what would unfold. But, gradually, markets began to stabilize and buyers waded back in. Businesses in industries that could make the changes, large and small, that would ensure their survival have been in high demand.
On top of that, the pause has resulted in significant pent up demand from buyers and, more significantly, capital.
Generally speaking, because of that demand, valuations have gone up for businesses that have been able to weather the COVID storm. The pace of inquiries coming into our offices – particularly from small private equity groups and family offices – has reach the levels that we saw in 2018 and 2019, banner years both.
This trend creates the potential for a nice run over the next 12-18 months for business owners who plan for a sale properly now so that their business looks as good as possible when they’re ready to pull the trigger.
According to Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, and quoted in Smart Business magazine, “The M&A world has gotten much more competitive on the buyer side. There are many more buyers out there than there ever have been and a lot of cash on the sidelines looking to get in on the action. Buyers are looking to invest in quality companies, and that gives sellers a lot of opportunity, and leverage, to negotiate a deal.”
So, demand is strong from the buyer side and there’s plenty of capital out there looking for a deal. But what other factors are impacting the M&A market?
Selling a Business Now: Risks
All of this “good news” is not without some risks, however.
Taxes are a big concern.
The government spending blowout that erupted – some of it actually targeted to Covid-related economic damage – in 2020 and that is expected to continue in 2021 has many many people expecting higher tax rates down the road.
Most Western governments are already developing tax changes that will result in higher rates.
In the United States, for example, the new administration is threatening to increase the capital gains tax – which is the one that bites a business seller most deeply – from the current 20% to 39.6%; effectively doubling the tax hit. Most other Western countries are planning similar moves.
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An additional concern in the U.S. is the push by reputedly intelligent people to increase the minimum wage.
Higher wages means higher costs and lower profit – and therefore lower values – for businesses. Lower values translates into lower proceeds at the sale of a business; and possibly a change of plans for retirement.
Business owners that are approaching the date they’d planned to exit would be wise to discuss the potential impact on their expected sale proceeds with their accountant and financial planner. Prior to that discussion, we strongly recommend that owners get a valuation done by a professional business broker – ideally, one with a CBI designation – so that decisions can be made with all the necessary information in hand.
The Bottom Line
As has been the case throughout human history, government actions have a direct effect on business. And every such effect on “business” impacts the value of businesses.
This is pretty simple and should be apparent to anyone with a three-digit IQ. The more costs – from wage mandates to regulations – imposed on business, the less any business will put in the pocket of the owners of that business. It naturally follows that the less money the business generates for the owners, the less money a buyer will pay for it.
Now, one can argue – as many do – that the world would be better off with less money going into the pockets of business owners and more money going into the pockets of governments. But any discussion about the merits of such an argument is beyond the scope of this blog; FAR beyond.
Business owners and professional business brokers – our audience and the clients we serve – are generally a pretty smart group and can figure out the impact of these events on the value of the business they may want to sell or the businesses they represent. Many will act accordingly – which is why the next year or two is expected to be a great time to sell a business – and to represent business owners ready to sail off into the sunset.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.