Timing is crucial in many walks of life, from deciding when to launch your company in a new market, to misjudging a gust of wind on the golf course. When it comes to selling your business, bad timing can be the difference between receiving an optimal offer from a committed buyer and leaving hard-earned money on the table.
As President and CEO of leading M&A advisory firm Generational Equity, Ryan Binkley understands the impact timing has on a business sale more than most, which is why he and his team of dealmakers always inform clients when the market is ideal and flush with interested buyers.
And, as many will attest, the conditions for both exiting and acquiring companies has rarely been better than it is in 2018, helped in no small part by tax reform at the tail-end of last year.
The Tax Cuts and Jobs Act of 2017 (TCJA) has unlocked substantial resources for businesses of all sizes and spurred an emphatic rise in M&A activity, particularly among middle market companies. Through the TCJA and the pre-existing positivity in global M&A, businesses in the United States are keen to explore their opportunities.
In this blog post, Ryan will outline: what the TCJA is; how this tax reform is encouraging M&A activity nationwide; as well as factors influencing how you time your exit strategy in pursuit of the maximum return for your largest asset.
Tax Cuts and Jobs Act: A Quick Guide
The Tax Cuts and Jobs Act of 2017 was signed into law by President Trump on December 22, 2017. Its overarching purpose was to reduce tax rates for both businesses and individuals and lead to more job opportunities with greater wages.
For business owners, the headlines of this highly publicized tax reform are as follows:
- The Corporate Tax Rate plummeted from 35% to 21%, the lowest rate since 1939 – this will undoubtedly produce more capital for all businesses to invest
- The TCJA also raised the standard tax deduction for certain pass-through businesses (sole proprietors, partnerships, LLCs) to 20%
- Businesses can deduct the cost of depreciable assets after one year rather than amortize them over several, allowing them to generate quick and more frequent cash-injections for their unneeded assets
- With $2.6 trillion held in foreign stockpiles, the TCJA allows companies to pay a one-time tax rate to repatriate this to the U.S. to employ domestically
- The TCJA eliminated the corporate AMT, meaning companies can deduct the cost of research and development spending, as well as investments made in low-income neighborhoods
These are just the headlines of how this tax reform impacts companies of all sizes across the United States, but Ryan Binkley believes they paint a clear picture for business owners. Whether or not you agree with the argued long-term benefits, right now the tax reform has unlocked significantly more capital for companies to invest.
Naturally, business owners have indicated these additional resources will be spread over a number of objectives, including investing in equipment, creating jobs, and improving research and development efforts.
But, one of the standout areas business owners, particularly in the middle market, are focusing on is M&A activity. The excess capital created by the tax reform, coupled with the existing strength of the current seller’s market, has made mergers and acquisitions an attractive option for both buyers and sellers.
How Tax Reform is Affecting M&A Activity
The recent EY Tax Reform Dollar Deployment Survey conducted by Ernst & Young emphatically illustrates the influence tax reform is having on the attitudes of executives towards M&A. Out of all surveyed, 73% are likely to accelerate their M&A strategies in the next 12 months.
This enthusiasm is even more pronounced among mid cap companies, with 82% of these executives interested in exploring M&A services, and 94% of these owners are aiming for transactions worth under $1 billion. Yet, 48% of buyers are willing to pay more in the current market to acquire companies than in previous years.
E&Y’s survey fully illustrates that mid cap companies are the group most inspired by this tax reform. As well as accelerating their M&A activity in response to tax reform:
- 72% of mid-cap companies plan to repatriate overseas earnings
- 66% of executives want to pass some of their tax savings onto customers
- 89% plan to increase staff compensation
- 38% aim to use these savings to create jobs, with 33% intent on increasing salaries and 28% wanting to provide bigger bonuses
In addition, lower taxes will encourage business owners to consider corporate divestitures due to the reduced risk, increasing the potential for partial sales, while cross-border M&A activity, the subject of Ryan Binkley’s previous blog post, will also be impacted. With more capital being available domestically, U.S. acquirers should have more incentive to pursue companies overseas.
In summary, the tax reforms presented in the TCJA have created the conditions to quicken M&A activity for middle market businesses. Not only do they have access to more capital for investments, but the immense competition has increased the overall value of companies.
With companies looking to invest excess capital into the acquisition of others, now represents an excellent opportunity for those prepared to sell to pursue the optimal value for their business.
As Ryan mentioned at the start of this article, timing is everything when it comes to exiting your business. Rarely do factors align in such a way as they do now to aid you in achieving the highest possible value for your company, so you need to be able to identify these occasions when they emerge.
How Can I Time My Exit Strategy Effectively?
So, what factors should you be looking for when deciding when the right time is to exit your business? Well, as the tax reform clearly illustrates, changes to legislation are often a powerful cause. Major reforms such as this that impact the economy and the resources available to businesses are undoubtedly going to influence the number of M&A transactions one way or another.
When discussing an exit plan with clients at Generational Equity, Ryan Binkley identifies three critical factors that determine whether now is a great time to sell:
- Capital gains tax rates
- Interest rates
- Buyer activity
All three are important, as any one of them can drive M&A activity on its own, but the current convergence of all three has created a particularly strong seller’s market.
Naturally, the support of a professional M&A advisory firm will guide you on the current strength of the markets, and whether now is the ideal time to pursue buyers. But, there are certain things to look out for to gauge the timing of your exit strategy, such as:
- Is the economy growing or receding? Professional buyers are more confident when local, national and global economies are thriving.
- Are executives keen on growth? M&A strategies are the fastest, most efficient ways to grow an organization, so when buyers are looking to expand, that is where they are most likely to turn.
- Is your industry experiencing a boom period? You’re likely on the pulse of how your industry is doing, meaning you know if people are keen to invest into it. Even if the overall economy is experiencing a downturn, your sector could remain a diamond in the rough.
- How much funding is available to private equity firms? At the end of 2017, around $200 billion was waiting to be invested by PE firms. These are very prominent buyers, so keeping tabs on that number could pay dividends down the road.
- What’s your company up to? Has your company experienced a period of strong recruitment? Is it about to launch a major product? Are you preparing to update your branding? These factors will influence how much you are worth now versus a few months down the line.
Ryan cannot stress enough how essential the timing of your exit strategy is to receiving an offer that fulfills your objectives and secures your financial legacy. By paying close attention to these factors, you start to paint a picture in your mind about the right time to sell, something the support of an M&A advisor will help bring to life.
Will You Take Advantage of Tax Reform?
But, and it’s a big but, knowing that right now is an ideal time to sell a business will not help if you don’t have a professionally crafted exit strategy. Timing is a key factor in exiting for the optimal value, but it can’t work on its own.
From receiving a helpful estimation of your business value, to applying value enhancement techniques like recasting, all the way to locating the correct buyer for your goals, a detailed and regularly updated exit strategy allows you to take advantage of events like this tax reform.
It’s far better to be prepared for when the market is at a peak time than use this as your catalyst to start your exit planning – by the time you’re ready to sell, the market might not be as strong as when you began. This way, you are in the position to sell when you want to, not when you have to.
If you’d like to learn more about how tax reform is influencing M&A activity throughout the U.S., or tips on timing your exit strategy to perfection, Generational Equity’s insights page provides regular updates on the market and how to pursue the optimal value.
If you would like to read more by Ryan Binkley, check his blog for more in-depth articles on a range of topics.