FOR EXECUTIVES SEEKING TO BUY, SELL, OR RECAPITALIZE BUSINESSES
2009: Exit Planning For The Year Ahead
2008 is over! That is a welcome relief for many business owners. After several years of solid growth, 2008 has been a harsh year for business executives. Empirical evidence suggests that a vast majority of businesses have seen their revenues stagnate or decline in 2008.
For Business owners who were planning to retire or cash out of their business for other reasons, 2008 was tough. Business was soft, credit was hard to come by, and liquidity levels were low. All of these translated into a very negative environment for deal making especially in the housing, construction and retail industries. Business owners who had their businesses on the market saw less than stellar business valuations and, in most cases, found that their deals did not close as planned. Several other business owners who were planning on exiting held back - unwilling to face a reduced valuation and hoping things would be a bit better in the not so distant future.
As we look into 2009, it appears that while we have not seen the bottom in the US economy, California economy may be a step ahead. While widespread economic growth is not imminent, it appears that we have seen the bottom. Does this mean business owners should wait for the growth to return and delay their exit/recapitalization decisions until late 2009 or 2010? Not necessarily!
When evaluating the consequences of environmental trends on the business sale/recapitalization process, it is useful to keep in mind that the business sale/recapitalization process for a mid market business can take about 12 months. Most acquirers/investors look carefully at business performance as they navigate through the deal process and positive trends along the way can be helpful in closing a deal and in getting the terms sought by the shareholders.
Here are some key factors business owners need to take into account while planning exit/recapitalization strategies this year:
Ø Economy: While widespread growth is not imminent, several segments of the market are starting to pick up. Most construction related businesses continue to be in the doldrums, but the prognosis for several other business categories is getting positive. Based on the commentary we are hearing from industry sources, it seems likely that most businesses will see a better 2009 than what they saw in 2008. This positive trend can be beneficial to companies and shareholders with near term plans to exit or to recapitalize their businesses.
Ø Interest Rates and Liquidity: Long term interest rates are inching downwards and credit is expected to get better as the year progresses. 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, make the chances of putting together winning deals a lot more likely.
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. With a new administration in the White House, most tax experts believe that the low 15% Capital Gains Tax rate is unlikely to stay at that level and there is a substantial risk of the rate being changed to something higher. The prospect of increased Capital Gains Tax should be carefully thought through in the context of the business exit/recapitalization process.
Ø Deal Making Opportunities: Acquirers are a lot 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 reverse 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 of a type that can be 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, 2009 would be an excellent 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.