Finally, some good news ahead for business owners. The economy is growing (albeit slowly), commercial lending is on the rebound, and buyers are actively competing over acquisition opportunities.
If you are considering selling your business in the next couple of years, here are four reasons why it may be the time for you to act:
Taxes. Once again, we’re facing expiration of the Bush-era tax cuts. Without an extension, capital gains taxes are set to increase from 15 to 20 percent. Meanwhile, new Medicare-related taxes of 3.8 percent on unearned investment income went into effect in 2013. That means business owners that wait to sell may have to generate roughly nine percent more in overall value just to break even than if they would have sold in 2012.
Idle Money. There is a record amount of cash on corporate balance sheets. In addition, private equity groups had some of their best fundraising years in 2006 and 2007. They’re sitting on record cash balances, and they’re running out of time to use it. PEGs are ramping up and competing against strategic buyers to acquire new businesses and put that money to work.
Leverage Multiples Up. A leverage multiple is used to calculate the maximum amount that will be lent on a commercial loan. According to GF Data, debt multiples for the middle market (values from $10 million to $250 million) increased slightly by 0.2x (to 3.3x) in the first nine months of 2011.
It’s a small increase, but it matters. The greater the availability of debt, the greater the supportable purchase price. For comparison, average debt multiples were just 2.8x in 2008 and had reached a high of 3.7 in 2006 and 2007.
Economic Uptick. Looking at the economy, the coming years should be stronger. Goldman Sachs is predicting global GDP growth of three percent and U.S. GDP growth around 2.5 percent. While that’s slower than we would like, it reduces buyers’ fears that we’ll be entering a double dip recession. The wild card, of course, is the European financial crisis.
Here at Cornerstone, we are seeing indicators of economic improvement. Looking at one of our typical clients, a manufacturing company with $8 million to $10 million in revenues, they saw growth of roughly a negative 4% in 2010 and a positive 13% in 2011. This is not atypical of what we’re seeing from new engagements.
As far as M&A market activity, at Cornerstone, where we serve the lower middle market, we’re seeing a substantial uptick, doubling the deals we’ve done from 2010 to 2011.
Remember, it takes at least six to nine months, on average, to sell your business. Talk to an advisor to get an accurate picture of your estimated business value and tax scenario.
Scott Bushkie is President of Cornerstone Business Services, a low-to-middle-market M&A firm. Reach him at 920-436-9890 or [email protected]