Should You Sell Your Company Now?
We spoke to nearly two dozen prominent investment bankers to provide you with an informed insight on whether to sell your firm or not during these uncertain times.
Should I sell my company now? As Covid-19 has subsided in recent months, many business owners have given this question a lot of thought lately. With the Democrats controlling both chambers of Congress, U.S. President Joe Biden is trying to make good on his campaign promise to raise capital gains taxes. Despite or because of that, the mergers and acquisitions (M&A) market is booming. In 2021’s first quarter, M&A activity increased by 6% compared to the first quarter of last year. There are many factors to weigh before selling a company, but we wanted to offer some insights from prominent investment bankers to allow owners to have more information as they contemplate their options.
Reasons for Selling:
There are many reasons that a business owner must consider when it comes to taking their company to the market. While some of the factors that encourage an owner to sell a firm are unique to that business’s needs, other factors may be related to the current political climate and economy.
Most of our interviewees agreed a company’s valuation is the number one factor to consider before selling. A robust valuation can happen when there are more buyers and low interest rates on debt, as is the case now.
“We’re seeing an upswing in appetite and valuation,” said Scott A. Davis, director at Provident Healthcare Partners in Boston, MA. “I think people were worried about 2021. That obviously didn’t come to pass,” he added.
For some financial advisors, the time has never been better to sell a company. “It’s kind of like the perfect time to go to market,” said John J. McDonald, general counsel and managing director at New York-based Bankers Capital International, “We’ve got valuations at all-time highs.”
While the M&A market has largely witnessed a significant boom, Reuters reports that one sector has not fared as well: the real estate. As companies increasingly embrace remote work, few people appear to be interested in buying office buildings.
A second factor to consider is the Covid-19 impact on 2020, leading the government to pump priming money into the economy through several stimulus relief checks to the public, making potential buyers less concerned with the present market.
“The government is obviously stimulating the economy, and the economy is reopening, and there’s a lot of optimism in the U.S. market,” said Emery Ellinger, an advisor and founder of Aberdeen Advisors, a Florida-based M&A firm.
Ellinger added that the retirement of the baby boomer generation is “probably the biggest factor” for the increase in M&A activity. The boomer generation refers to people born between 1946 – 1964, following World War II. Many boomers are business owners who became fatigued by the pandemic and may want to retire earlier than planned.
“Covid really shook a lot of business owners,” he said.
The final reason is related to the political climate. Democrats control both houses of Congress and the White House. President Joe Biden won on a campaign to increase capital gains tax rates from 20% to 39.60% on companies making a million-dollar profit or higher. Biden has already proposed the bill, and if approved, experts say owners will need to carefully weigh the pros and cons of selling.
“It’s inevitable that there’s going to have to be some more taxes collected across everyone, companies, individuals, and so on,” said Geoff Long, an M&A advisor with Texas-based legal firm Thompson & Knight.
“I think it’s a well-founded fear that especially with the capital gains rates being very low at the moment, people are that certainly motivated to sell sooner rather than later in 2021,” he added.
Reasons for Waiting
The investment bankers and advisors we interviewed provided several other reasons for business owners to not sell their company this year. For instance, if a company is suffering financial difficulties or poor management, selling may be wrong for both investors and employees.
“If there’s a company that hasn’t had about a 75-80% recovery from the Covid experience, then they might want to wait a little bit longer until things stabilize,” said Rebecca Leiba, senior managing director at Provident Healthcare Partners in Boston, MA.
While the Covid-19 pandemic caused some companies to lose money, it was a blessing for others. But regardless of the impact, M&A brokers look at a broader period to assess a company’s financial health.
“We’re trying to normalize that,” said Bruce Vanderlaan, a senior advisor at Mertz Taggart, a Florida-based M&A firm, “and take a look at 2020, especially the 2nd quarter, and to say this is a blip on a radar. It’s a one-time event. We don’t expect to see it again, and so we’re either going to ignore or normalize that.”
Leiba agrees: “You never want to look at a short moment in time in analyzing a company. You really want to look at that historical perspective.”
The final reason for waiting is that your company may not be ready for sale because of inherent reasons such as low EBITDA, poor management, or other issues which will hinder the sale process.
“You have some companies that just can’t be sold,” said Roy Johnson, an M&A Advisor at Connecticut-based Touchstone Advisors.
“They may have poor management. They may have suffered financially. They might have margin erosion, that sort of thing you may have.”
Should you sell your company now? It’s a decision that only the owner can make, but we hope this article has helped educate them about their options. If you are considering selling your company, it might be wise to speak with an expert first so you can make the most informed decision possible about this critical life change for yourself and your family. Tell us what you think on LinkedIn, Instagram, Facebook, or Twitter! @opusconnect.