If you are considering selling your business, now is the perfect time to start preparing. With COVID largely in the rear-view mirror, the Mergers and Acquisitions market is experiencing tremendous activity given the rare confluence of five unique factors. There may not be a better time to sell over the next decade.
The current sellers’ market for Mergers and Acquisitions is being powered by the following five factors:
1. Pent-Up Demand
Many deals were put on hold in 2020 due to COVID, its impact on specific industries, and the relative uncertainty around the global economy.
Since we are now seeing a significant recovery across nearly all industries, many of the stalled M&A processes of 2020 are becoming active again. Private Equity and Strategic Buyers that were often unable to fulfill their acquisition mandates and deploy capital in 2020 are now seeking to double their acquisition efforts in 2021.
2. Buyers Are Flush With Capital
Financial buyers (Private Equity firms and family offices) had an abundance of capital ready to deploy in 2020. In fact, many Private Equity firms continued to raise capital through the pandemic and have now collectively raised $1.6 Trillion in committed capital seeking businesses to invest in.
As the economy bounces back, the need for Buyers to utilize this capital is now even more pressing, having effectively lost 2020. Corporate Buyers also have cash earmarked specifically for growth through acquisitions.
3. Likely Tax Increases
While we don’t yet exactly know how the Biden tax proposals will impact tax rates, it is safe to assume that corporate, individual, and capital gains taxes will likely be increasing for the foreseeable future.
Business owners considering selling in the next few years are asking themselves: “Why kill myself for a few more years to sell later, only to net the same amount, even if the company grows between now and then?” This is the right question to ask and one that should be factored into your exit planning strategy.
4. Historically Low Interest Rates
We know that current interest rates are extremely low. In fact, it’s highly likely that we won’t see rates this low again for the rest of our lifetimes.
Acquisitions are analogous to the housing market where interest rates are inversely correlated to purchase price—the lower the interest rate, the higher-priced house you can buy. Similarly, the lower the interest expense, the more you can borrow from a bank (assuming, of course, that your business has sufficient cash flow to support debt-coverage ratios).
The bottom line is that rock bottom rates enable buyers to pay more for businesses and still have ample cash flow to service the debt.
5. Increased Demand for Pandemic “Winners”
Just as the pandemic has further widened the wealth gap, it has also exposed the strengths and weaknesses of various businesses.
Naturally, when ten years of e-commerce adoption occurs over three months, there are bound to be winners and losers. The wide swath of COVID winners, such as digitally native brands, work-from-home products, and plumbing and HVAC (to name a few) are especially in demand. Buyers are willing to compete and pay a premium for these businesses which have proven to be especially resilient during the pandemic.
Aside from these five factors, business owners are re-evaluating their life priorities given the tumult that has transpired over the past 16 months.
The cumulative effect of COVID, social unrest, increased regulation, and emerging cyber threats has caused business owners, especially ones approaching retirement age, to realize that having time to enjoy a higher quality of life may be a higher priority than continuing to run their businesses indefinitely.
For all the reasons mentioned above, we expect the M&A market to be especially hot in the near term (over the next 12-18 months). If you are a business owner contemplating selling, it makes more sense than ever to take some risk off the table and gain liquidity.
If you are interested in learning more about how you can take advantage of this unique seller’s market before the proposed tax increases take effect, we’d love to have a confidential conversation with you.
Kevin Berson is an M&A Advisor with Kinected Consulting, based in Los Angeles. He specializes in helping business owners maximize outcomes in selling their businesses. He is also the founder of Kinected, a Management Consulting firm that advises companies with strategic planning, exit planning and merger and acquisition diligence. Kevin can be reached at kevin@kinected.com.
