When is the Right Time to Sell A Business?

In his hit song ‘The Gambler,” Kenny Rogers proclaimed, “You’ve got to know when to hold ’em, know when to fold ’em, know when to walk away, and know when to run.” These words don’t just apply to gamblers. In today’s market, these lyrics also apply to business owners. Should owners hold, double down, or sell a business to the highest bidder?

Here are some factors to consider:

Economic conditions are very strong. The underlying economic fundamentals paint a very positive picture now and into the foreseeable future – interest rates near historic lows, experiencing virtually zero unemployment, strong wages, and healthy housing and stock markets. The S&P 500 advanced 1.8% last month after surging 29% last year.

Political risks abound. If Democrats win the White House and both chambers of Congress, the wealthy could face expensive tax changes. Democrats running to replace Trump have promised to raise taxes on the rich. Former Vice President Joe Biden, for example, said he wants to almost double the rate on long-term capital gains to 39.6% for taxpayers earning more than $1 million a year. Bernie Sanders and Elizabeth Warren won’t be as gentle. For the owner of a multimillion-dollar company, selling by the end of 2020 could result in a much smaller tax bill than striking a deal in 2021 under new rules. Are you prepared to roll the dice?

In addition to capital-gains treatment, Democrats, including Sanders and Biden, have proposed changes to estate tax rules that would make it harder for the wealthy to pass on fortunes to the next generation. Democrats could also reverse provisions of the tax overhaul enacted in late 2017 which boosted many companies’ profits and valuations by slashing the corporate tax rate.

The regulatory climate will change. A Democrat in the White House would almost certainly seek to reinstate and strengthen regulations that Mr. Trump rolled back and wouldn’t need Congressional approval to do so. Consider the impact of Dodd Frank and the CFPB, for example.

The global playing field is changing. The U.S. – China trade wars, and trade wars between the U.S. and the European Union, would once again increase uncertainty. A serious Geo-Political conflict in the Middle East or other parts of the world could cause a spike in oil prices and/or other economic disruption.

Buyers are aggressively seeking acquisitions. Large corporations and private equity firms have unprecedented amounts of cash to deploy. Blackstone Group Inc., Carlyle Group, and other firms have almost $1.5 trillion in unspent capital, the highest year-end total on record, according to Prequin data. There are thousands of private equity firms looking for companies to purchase. Supply and demand is tilting in favor of those owners looking to sell and not toward buyers seeking to acquire them.  

Disruption is a real possibility. Some owners worry about the future of their industries, with the real threats of cyber theft and disruption from new competitors or technology advancements. Think Uber, Amazon, Netflix to name three major category changers. Could disruption happen in your industry? It probably already is.

The decision to sell a privately held, family business should not be made lightly.  Finding the right buyer, agreeing to price and terms, and closing the sale transaction takes a considerable amount of time and effort. At Kaulkin Ginsberg our strong recommendation to owners is to prepare for a sale even if you are not interested in selling out today. Understanding value in today’s market is a good place to start. Change is happening faster than ever before so don’t wait too long.

To schedule a confidential call with one of our advisors, contact us at hq@kaulkin.com.

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