FOR EXECUTIVES SEEKING TO BUY, SELL, OR RECAPITALIZE BUSINESSES
2012: Exit Planning For The Year Ahead
The tide has turned! For majority of the businesses we follow, the year 2011 was the first year of growth since 2007. Apart from the real estate sector, which continues to show downturn, most other parts of the economy are showing signs of life.
In 2011, credit eased a bit but continued downturn in real estate meant the business owners had little equity to tap into. Even though the credit situation improved, business owners could not capitalize on the positive trend. Owners who had their businesses on the market saw reduced business valuations and, in the vast majority of these cases, found that their deals did not close as planned.
Equity in real estate is an engine that drives the credit markets and it is unlikely that there will be a strong all around growth without a snapback in the real estate market. Unfortunately, the current forecast calls for a continued downward trend in the real estate market in 2012. We, therefore, anticipate 2012 to be a year of very modest growth.
This is a harsh reality for business owners planning to retire or cash out of their business for other reasons. Business owners evaluating the consequences of the environmental factors on the business sale or recapitalization process, need to keep in mind that the process for a mid market business can take many months. Most investors look carefully at business performance as they navigate through the deal process. Positive trends during the process can be helpful in closing a deal and in obtaining the terms sought by the shareholders. On the other hand, negative trends can kill a deal or substantially decrease the deal valuation.
Here are some key factors business owners need to take into account while planning exit or recapitalization strategies this year:
Ø Economy: While strong growth is unlikely, it seems likely that most businesses will see a better 2012 than what they saw in 2011. This positive trend can be beneficial to companies and shareholders with near term plans to exit or to recapitalize their businesses. Business owners who can deliver strong growth will be in a better position than their counterparts when it comes to business sale.
Ø Interest Rates and Liquidity: Long term interest rates continue to be at historic lows and credit markets will likely continue improve as the year progresses. Fed is expected to keep interest rates low at least until 2014. Lower interest rates not only improve liquidity, but also have an effect of making valuations higher. Acquirers are likely to find a higher valuation more acceptable in a lower interest rate regime when they can finance the deal and still meet the cash flow metrics needed. Lower interest rates, coupled with improved liquidity, increase the chances of putting together winning deals.
Ø Taxes: Unfortunately, selling a business with a gain means that a business owner has to pay capital gains tax or ordinary income tax on the gain. Since capital gains are taxed at a lower rate than ordinary income, a competent business M&A specialist attempts to structure much of the gains from the sale of the business as capital gains. In the last few years, business owners have been beneficiaries of a historically low 15% Federal Capital Gains Tax Rate. It is unlikely that there will be changes to the capital gains rates in 2012. For 2013 and beyond, business owners should carefully consider the prospect of increased Capital Gains Tax in the context of the business exit or recapitalization process.
Ø Deal Making Opportunities: Acquirers are more likely to buy a business in a flat to upwards trending market than in a downward trending market. Deal making opportunities should become more abundant as the economic trends improve through the year. Deal making opportunities are also likely to be aplenty if the business is in a growth oriented segment, or if the business is desirable to foreign companies. With the US Dollar being relatively weak, foreign entities are actively looking to make synergistic acquisitions. It is unclear how long the weak dollar will last but the prognosis is for the dollar to continue to be weak for the near term.
All things considered, 2012 would be a good time for business owners to review their exit or recapitalization strategies and determine how to approach the business sale/capitalization process for optimum financial return.
For assistance with selling or recapitalizing your mid market company, contact:
Chakradher (Chak) Reddy
Elite Mergers & Acquisitions
creddy@EliteMandA.com www.EliteMandA.com
11707 Fair Oaks Blvd, Suite 201, Fair Oaks, CA 95628
Ph: 800-335-3068; Fax: 888-502-3817
Disclaimer: This document is for informational purpose only and should not be construed as tax or legal advice. Please contact your CPA/attorney for advice on your specific situation.