It Is A Good Time To Sell A Business
Is It A Good Time To Sell?
Given the current economic uncertainty, is it better to wait or should you sell your business now?
Some areas for consideration include:
Supply and Demand
There is a good pool of buyers. A lot of Companies are interested in expanding thru acquisition of a smaller company. Also, with the massive corporate layoffs, there are more potential buyers right now. Displaced middle managers and executives who are unemployed and tired of working for someone else are ready to buy and most come armed with 401K money available for down payments on a business purchase.
Low Interest Rates
Interest rates are at historic lows. Low interest rates mean that buyers can afford to pay more for a business. Whether it is a "sophisticated buyer using discounted cash flow analysis, or someone calculating "how much can I afford a month? The same math holds true; lower interest rates mean lower debt service payments and higher cash flows from the business. Lower debt payments and higher cash flows result in increased value. When buyers pay less for loans, they can pay more for the business.
Financing Is Still Possible
Private Equity Groups still have significant resources to employ for good opportunities-particularly in recapitalization situations. Banking requirements have gotten tighter, but not all local or regional banks are Closed For The Season to attractive situations. The Small Business Administration guarantees a portion (75%) of an SBA loan made by the lender. The SBA is again open for business. The maximum Small business loan size has also recently increased from $2,000,000 to $5,000,000. This increased amount could enable closing a larger deal that might otherwise be more difficult to finance in todays market. Most Sellers will need to finance a portion of the sale. That portion will need to be larger in those situations where bank or SBA financing is not available.
Relatively Low Capital Gains Tax Rate
It is what you keep from a sale that really matters. With the recent congressional deal to make permanent most of the Bush tax cuts, a least we have a little certainty on this subject for a time. Although the capital gains and dividends tax rates will increase to 20% for those earning over $400,000, they are still historically low. The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 will add an additional 3.8% tax on investment income for couples making more than $250,000 per year beginning in 2013. Finally, the top ordinary income rate will increase from 35% to 39.6% for those individuals and pass thru corporations earning over $400,000. When you sell, you will likely be subject to both ordinary income and capital gains taxes. There are often some things we can do in the deal structure to defer or reduce the amount of taxes paid.
What If I Wait
No one has a crystal ball. The economy may improve over the next year or maybe not. Your competitor may go out of business or maybe a new one comes on the scene. A key employee may suddenly resign. You may get a windfall of new clients and the business surges. Or, alternatively, you may lose a major long term client. Maybe an unexpected illness or major health issue develops. Will your regulatory world change for the worse? You can never be sure what the future holds.
Do you know what your business is worth right now? Do the proceeds generated from the expected deal structure meet your needs? Do you know if there is a market for your business? Do you know what can be done to increase the value of your business?
So is it a good time to sell?
It may or may not be, depending on your current business situation and your personal goals, other constituent considerations and market factors. However, it definitely is a good time to do some serious evaluation of your alternatives. It is time to do a little Exit Planning with your Business Broker and team of business advisors to determine the best strategy for you!