Nearly every day I am asked some version of this question: “I’ve heard that valuations in my industry are high and that taxes are going to increase. Do you think my business is worth X?” If you are wondering what the current market is like or had this same question then you are in the right place!
For business owners, COVID was a lightning bolt of a reminder that black swan events can and do come along that disrupt even the best laid plans. For many, the 2008 financial crisis was probably starting to feel a little distant. Perhaps you were re-assessing your appetite for future market uncertainty when COVID hit. Whatever the root cause, turbulence in the macroeconomy is an important reminder that other forces are at play in the value of your business and the ability to sell it.
In the United States, we may well be jumping straight from COVID into an unparalleled economic boom. Some are suggesting we are embarking on a new Roaring Twenties! I will share more thoughts on market incentives driving buyer and seller behavior below, first I want to introduce a foundational concept:
Buyers are not buying the business you are selling – they are buying their version of the future.
You are selling the future potential of the business in the hands of the optimal buyer.
The underlying point I am getting at is that your optimal buyer has an opinion (a strong one!) on the macroeconomic outlook. Therefore, you must always monitor external, market forces, and consider the impact they have on your business and future plans.
Let us talk about some of these market forces in more detail.
Capital gains tax – Federal
There is a lot of news in the media and chatter amongst business owners and the advisory community about proposed changes. I know this is first of mind for a lot of you reading, we will devote our next post exclusively to this topic. If you want to read more detail from a reputable source now, here is one we as CPAs recommend.
Executive summary: Capital gains rates will be higher. The changes could be retroactive. For those considering a 1031 “like kind” exchange of commercial real estate – these may be curtailed.
Expect a whole lot of horse trading over the details on this one. There has not been a lot of movement from Congress yet, I anticipate a lull in debate on this topic over the summer before things really heat up in September.
SBA Financing Incentives for Buyers
I have previously written about this so I will not go into too much detail today, but there is a pot of money available through the CARES Act that will expire on 9/30/21 or when the funding runs out. The main two benefits to buyers are:
- SBA loan fees are waived. These typically range from 2.0 – 3.5% of the loan amount – saving a buyer $150k on a $5M loan!
- The first 6 months of payments are made for you by the SBA, up to $9,000 / month. Note this is not a deferral, it reduces the loan principal as the payments are made on your behalf.
Capital gains tax – Washington State
The 2021 Washington State Legislature recently passed ESSB 5096 which creates a 7% tax on the sale or exchange of long-term capital assets (stocks, bonds, business interests, or other investments, and many tangible assets) if the profits exceed $250,000 annually. This write-up by a fellow CPA is the best overview I have come across of it, note the exclusion for closely-held small businesses with gross income of less than $10M in the preceding year.
Use this link to sign up for updates from the WA Department of Revenue about the implementation of the tax. Note it takes effect on January 1, 2022, and the first payments are due on or before April 17, 2023.
Yep, demographics. My friends, our part of the United States is GROWING. Wondering if this was true during COVID? Check out this recent article. Seattle was the fastest growing large city in the country during 2020. In fact, the population growth rate increased relative to 2019. This has a magnifier effect on Washington as the core economic engine for the region.
Taking a step back, here is an interesting chart from the US Census Bureau. From 2010 – 2020 the average US State saw population growth of 7.4%.
Population growth in Washington during this period? 14.6%!
Utah and Idaho top the list. The takeaway is clear: growth and economic activity are increasingly driven by the West and the South.
There are many factors driving this shift, the important thing to keep in mind is that the trend is accelerating. More people = more opportunity.
Liquidity and Valuation Multiples
Along with business owners, I talk to prospective buyers daily. Buyers we work with include owner-operators, ex-Corp. America executives, PE shops, family offices, and capital groups. Their hunt for acquisitions is intensifying given nearly $2 trillion of dry powder held by PE funds, company balance sheets, and surging asset class values. Multiples are near (or at) pre-COVID values.
Did anyone else see the Wall Street Journal article where banks are turning down deposits?! This is a unique period in our economy.
This one often gets overlooked by business owners because we have been in a low-rate environment for some time. Did you know that the US Prime Rate hasn’t been this low since 2015? The historical data is summarized here by JP Morgan. Those of you that follow Federal Reserve policy know that the Fed has communicated that they intend to keep the Federal Funds rate at its current level through 2023. This is a powerful, forward looking signal to PE shops, lenders, and finance professionals.
It is important to keep in mind as SBA loans are tied to the US Prime Rate. Historically as rates increase we experience a narrowing of business valuation multiples, impacting the price sellers can obtain for their business.
That is it for today – more to come in a future post. Please forward / share this content if you find it helpful in your decision making process. As always, thank you for reading!
At Washington Business Brokers we are experts in valuation, optimizing a business for sale, buyer identification and qualification, negotiation, deal structuring, and closing. Our strategic advisor, Glen Cooper, has sold 500+ businesses in his career and is a nationally recognized author and trainer in selling private businesses.
We do not sell you on selling your business or buying one. Instead, we listen, provide options and expertise, and ultimately partner with you to accomplish your goals.
If you would like to better understand the value of your business or learn more about the process of confidentially selling:
call or text 937.344.8750
email [email protected]
or schedule time for an exploratory chat at calendly.com/ryanhemmert
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