The average private business owner in America is over 60 years old, according to Barlow Research Associates, and 40% of owners are 65 and older; most of them considering the ownership transition of their business in the next three to five years. At the same time, 77% of small business’ sales have been negatively impacted by COVID-19. We also have the uncertainty of the upcoming presidential election and consequences for private businesses.
So, why would you consider selling a company now?
We had several acquisitions working in March when everything shut down and were not expecting to initiate any new engagements until late summer. However, we did start discussions on a new acquisition at the end of May. The company’s revenues and margins had been stable leading up to COVID and we were expecting a modest response. Surprisingly to us, the response was overwhelmingly positive and, as of last week, we have nine bona fide offers to acquire this company, five of which are at or above pre-COVID market value. How could this be?
Buyers have capital and can’t spend it in 2020
There are very few companies available to merge or acquire right now, which means far greater attention for every business owner willing to discuss an acquisition. Additionally, there is broad optimism that the return to normal will begin this fall.
Buyers understand the impact of COVID
Private company buyers partly attribute valuation to the trailing twelve months of EBITDA (Earnings Before Interest Tax Depreciation and Amortization). Current best practices, however, allow for EBITDA+C (+COVID), i.e. allowing for performance adjustments through COVID. A buyer will want to see the beginning trajectory of a business’ recovery from COVID but is willing to credit pre-COVID performance and a clear path to return to that performance. There are also deal structures and timing that can bridge the COVID period.
Understanding extraordinary, non-recurring and unusual expenses and losses
When considering valuation, a buyer will also allow for valuation adjustments (increases) for extraordinary, non-recurring and unusual costs, expenses and losses due to COVID:
Extraordinary – an underlying event or transaction has to be (i) of an unusual nature and (ii) infrequent (i.e. of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates).
Non-recurring – non-recurring addbacks from the most recent two years that are not expected to recur within the following two years.
Unusual – unusual describes an underlying abnormal event that is unrelated to, or only incidentally related to, the ordinary activities of the entity, taking into account the environment in which the entity operates. Unusual expenses could include purchase of PPE, cleaning and disinfecting, relocating employees or equipment, pandemic planning expenses, security and screening, cancellation of events, production delays, missed deadlines due to supply chain interruption, related IT and training costs, premium pay during COVID for normal duties, terminating contracts or complying with contractual provisions invoked directly due to COVID.
How does this apply to your business?
The number of companies available to acquire is historically very low and demand for acquisitions remains high. This supply demand imbalance is yielding higher attention for companies that are performing reasonably through COVID. Not only higher valuations, but increased attention and prompt review, diligence and closing.
Should you sell in 2020?
We have more companies we’re starting sale discussions this week, but the answer for your company really depends on your particular circumstance and performance through COVID and return to pre-COVID performance. COVID-19 is new territory for everyone, but our recent experience is certainly encouraging.
Tax Consequences of a New Administration
In addition to the COVID fallout, eyes are also on the outcome of the Presidential election in November. A new administration would likely mean a less favorable tax, regulatory and business climate. Steering clear of political party affiliation, another four years of an incumbent administration is mostly understood by business owners, while a new administration would bring uncertainty in regulatory policy, anti-trust policy, monetary policy, and tax policy, all of which can create challenges or opportunities for businesses and acquisitions.
Under a new administration with the current frontrunner, the tax plan proposal would raise tax revenue by the highest amount in American history, by $3.8 Trillion over the next ten years. If this comes to pass, there will be a rush of business owners selling their companies before the tax hikes come into effect. The tax increases could cost many business owners millions of dollars in after tax proceeds when they sell. If you want to remove the uncertainty of a Presidential election and the potential tax consequences, you should plan to complete the sale of your business as soon as possible.