The often-used mantra to describe valuable real estate is location, location, location. When selling a business, the mantra is timing, timing, timing. Understanding the times to buy and sell can be critical to your exiting success and post-exit lifestyle.
The last recession had a negative impact on many businesses. In 2008 most business owners were in survival mode and concerned about the future sustainability of their company. For now the storm appears to have passed, and everyone seems cautiously optimistic.
In January 2010, I wrote a newsletter article about private capital transfer cycles using an observation of Robert Slee, author of “Private Capital Markets.” In my article, I fortuitously predicted 2013 as being a turnaround year based on Slee’s theory. I wrote:
“To put this in perspective, let’s look at the transfer spectrum chart below. You should note that the past three economic 10-year cycles had recessions followed by three-year periods of growth. The past 30 years may not repeat themselves but if the pattern continues, 2013-2018 may be a prime period of business sales and transfers. Waiting beyond that date may border on another recession.”
Now is the Time
Frankly, I was surprised by the accuracy of my 2010 prediction as so much debt has been pumped into the system. I thought this burden would cause inflation and add a few additional years for the recovery. But behold, the pattern is repeated again.
What does this mean to business owners? If you are considering your exit, especially if you intend to sell, now is the time to get your house in order and in sale-ready condition. Private business owners should begin to position themselves for this window to “handcuff” their management, increase profitability, replace themselves (succession plan), and monetize their private business equity (exit plan).
Why do you need to plan for this inevitable exit? According to a recent study by the Small Business Administration, “At any given time 40 percent of the U.S. businesses are facing the transfer of ownership issue and the primary cause of failure … lack of planning.”
When an owner faces the decision of how and when to leave his or her closely held business, one of the key components is how to reduce the level of taxes triggered by the exit. With the changing economic climate, taxes are and continue to be one of the major pieces of the puzzle that needs to be deciphered in order to maximize net proceeds to the business owner. Combined federal and state tax rates can be as high as 50 percent or greater. Therefore, early tax planning is critical in helping the owner achieve his financial goals.
The exit plan will lay out your options, the company value before and after taxes, and the number you will need to replace your income. This is important for an outside sale (competition, consolidator, investor) or an inside sale (employees, management, family).
Get Early Seller Representation
Furthermore, with an outside sale, you would be wise to have early seller representation to position yourself for this complex process against seasoned buyers who have a great wealth of experience with purchasing companies. Having a certified mergers & acquisitions representation for a seller will give the owner more control over the selling process with negotiations, bringing numerous offers and competitive bidding—resulting in higher prices for the owner.
Also, with an inside sale the deals are usually structured over several years. Timing is not as critical as an outside sale. The good news is they are flexible and favorable with your tax planning. The key is to start early as there are a lot of strategies to be considered that have to be implemented before the exit begins.
Don’t Miss Out
Beacon is witnessing the wave of baby boomers looking to retire and ride this booming cycle that may last for the next two to three years. The 2012 Market Pulse Survey Report by the International Business Brokers Association confirms this observation. If business owners miss this prime window for selling, they can expect that, based on the chart above, the next prime selling cycle will take them into the next decade.
For baby boomer business owners in their 60’s, that may be too late. This window, over the next few years, may be the last opportunity to exit and enjoy a comfortable retirement. Waiting for the next recession and the subsequent economic recovery will take those owners well into their 70’s.
This current window and timing will also help the owners wanting to transfer their company to their employees or management. The increase in profitability will offer a higher valuation and provide the cash flow to reduce the risk of monetizing their exit. The healthy cash flow during strong business cycles fuels the exit and reduces the amount of risk required to execute the transaction. The secret is to use legal tax strategies to allow Uncle Sam to subsidize your business exit.
The Bottom Line
If you intend to get your house in order, hire a mergers & acquisition advisor to represent you and your company and get it in sale-ready condition.
If you are preparing for an internal transaction (ESOP & MBO), meet with a certified exit planner who will help you to understand your options and show you how to leverage the growing economy so you can maximize your exiting dollars.