By Maurie Cashman
Is now the time you should sell your business? In business, as in investing, you try to buy low and sell high. We talked last week about Protecting Your Assets. Part of that protection is understanding the current market value for your business. Here’s why now just may be that selling-high time.
Last week Fortune Magazine reported that M&A activity is the highest since before the recession, but the benefit of the buying wave has yet to hit the economy. Mergers and acquisitions are back in a big way this year, reaching their highest level since 2007.
Selling your business is an option worth considering in the next few years. Some reasoning:
1. Low Inflation
Here is a chart from the Bureau of Labor Statistics.
According to the analysis, the 10-year moving average of inflation has been 2.39 percent, and the country’s most current annualized inflation rate is 1.95 percent. At these rates investors are desperate to find places to invest their money and get a decent rate of return. The (irrationally?) exuberant stock market is an alternative. Your business is probably their best alternative, with borrowing rates this low and other options so limited.
2. Aging U.S. Population
Take a look at this chart prepared by the Urban Institute:
If this doesnâ€™t grab your attention, look again. It says 16.3 percent of the population will be more than 65 years old by 2020, a 31 percent increase from 2000. By 2040 over one in five people in the U.S. will be a senior citizen. Will it be easier to sell your business in the next few years, or after 2020 when there will be many other older entrepreneurs also looking to sell and watch the Cubs, who may be playing .500 ball by then. According to a recent Pepperdine University study, 57% of business owners anticipate transferring their ownership interest in the next 5-15 years. You should be putting your ownership transition plans together now before a mass of manufacturing, distribution, and construction come up for sale.
Another question that should be in the forefront of your mind is, who are the buyers going to be?â€ As the population ages, there will be a larger demand for labor to support all of those seniors and the Social Security system. That means more competition for talent, wage inflation and reduced buyer pools. Secondarily, once pension funds begin liquidating assets to pay off their obligations, where will the investment demand come from for businesses like yours?
3. Low Interest Rates
The author, Barry Ritholtz, uses this chart to show that there has never been a better time for governments to borrow money and rebuild their infrastructure. But these low interest rates also indicate that there has never been a better time to sell your business.
After the financial crisis, businesses stockpiled cash to gird against more credit crunches, and the continually low interest rates supported by the Federal Reserveâ€™s bond-buying program allow companies to supplement their stores with cheap funds. There’s never been a better time for investors to borrow money and buy appreciable assets like your business. And, much like bonds and other financial assets, what will happen to the value of your business when rates head higher? It will likely drive discount rates higher. And when will that be? Possibly about the time that all of the Boomers are trying to sell their businesses?
4. Low Taxes
Here is a chart showing taxes on capital gains going back to 1916.
The capital gains tax rates were raised this year from 15 percent to 20 percent. But these rates are still the lowest since the mid 1990s (28 percent). If you sell your business now the tax rate on the capital gain you’ll likely realize is at a historically low level. If you have been paying attention to all of the talk about income inequality and the need to close the deficit, which line do you think is most likely to change? Thatâ€™s rightâ€¦ With taxes at such relative low levels the sale of your business as an ownership transition strategy must be on the table.
You should also be taking an objective look at your businesses condition and your ability to succeed in the long term. According to the Pepperdine study the top two current issues cited by business owners are Economic Uncertainty and Government Regulation. The top two emerging issues are Health Care Costs and Government Regulation. Interesting in light of the announcement this week of the controversial carbon emissions regulations. How well are you and your business prepared to manage these coming changes?
To sell your business is an option that should not be assumed, but must always be examined, possibly now more than ever.
What do you think? I’d love for you to join the conversation in comments.