Excerpted from Entrepreneur Magazine May 2007
If you tried to sell your business between 2000 and 2005, you probably had a difficult time finding a qualified buyer who was willing to pay a fair price. Part of the problem was that no one wanted to buy, cash was not readily available, and interest rates were unattractive. Another reason you might have had a difficult time attracting qualified buyers is that your sales or net income might not have been as impressive as they had been a few years earlier. In short, it was not the best time to sell. But that’s all changed. If you want to exit in the next 3 to 5 years, consider accelerating your plans. This might be as good as it gets. The mergers and acquisitions industry has had its ups and downs, but we are currently in one of the strongest sellers’ markets that we have ever witnessed. If you are thinking that you want to hold on a little longer to enjoy another year of strong positive cash flow – because you just can’t let go, because you think this upward trend will continue indefinitely or maybe you don’t know what you want to do next – keep in mind that bad timing could wipe out your anticipated gains.
Capital Gains Taxes Likely to Rise
There are several reasons why you would be wise to start the exit process now. Many think that capital gains taxes are likely to increase with the next administration. Under the Bush administration, Federal capital gains taxes were reduced from 28% to 15% until 2010. Given the current Federal deficit and the possibility of a change of party in the White House, it is quite possible, some say quite likely, that the capital gains tax will increase. That means you will need to sell for a lot more to net the same amount.
Interest Rates Likely to Increase
Another reason to sell now is that we are currently in a low interest rate environment. Buyers tend to pay more when the cost of money is low. In addition, there is plenty of cash available. This combination tends to drive up prices that buyers are willing to pay. Lower interest rates also make growth by acquisition a more attractive option than organic growth. A higher sale price and modest capital gains taxes add up to more dollars in your pocket.
Potential Future Buyer Pull-Back
Take a look at who is buying. Private equity groups are major players in this market. They are flush with cash and searching for businesses to buy. Many are paying top dollar and are leveraging their purchases to the hilt. A slow down in the economy could have a negative impact on the performance of their portfolio companies, resulting in a reduced appetite for more purchases.
Increased Competition for Buyers
Baby boomer business owners are just now beginning to think about exiting. According to a study by the University of Dallas School of Management, 80% of business owners are thinking about selling, 70% in the next three years. Their findings are consistent with other studies such as the Price-Waterhouse-Coopers study. Competition will be keen for attractive buyers. You will need to offer a more attractive opportunity in the future to even be on the radar screen of the most desirable buyers.
There’s Only One Catch
You or your business might not be prepared to exit now. Many business owners think they are well-prepared, but an outside independent third party or a buyer might disagree. Start working on your comprehensive exit plan today. It could take as much as three to five years to get your personal and business house in order. To maximize the net after tax dollars you walk away with, prepare now so you can exit for top dollar while market conditions are optimum. If you wait until the market peaks before you start preparing, you might find that you missed the opportunity and have to wait for the next upturn in the mergers and acquisitions cycle to exit on your terms.
