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M&A Update: Is Selling in 2021 Still Possible?

7/7/21 – Ely Friedman

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The current market for mergers and acquisitions is incredibly active. 2021 U.S. deal volume is already approximately 80% of 2016-2020 annual averages, demonstrating a stronger-than-normal year. As the U.S. economic growth accelerates back to “normal,” the M&A market expands synchronously. Prevailing market conditions are driven by a multitude of factors, including i) prospective sellers contemplating the impact of a potentially increased capital gains tax, ii) buyers searching for expansion and growth opportunities via acquisitions, iii) low cost of capital, and iv) buyers being flush with cash.

Selling a business is a decision that does not come lightly, and often requires considerable time and effort to contemplate. Among other things, a decision of this magnitude requires shareholder meetings, extensive conversations with advisors, and ample reflection on goals and objectives, often in conjunction with family members or key stakeholders. When the decision has been made to sell, focus shifts to facilitating the anticipated timeline and deal execution. While every transaction is unique, a traditional closing is completed in approximately two-to-three (2-3) months following a signed Letter of Intent (“LOI”). As a result, it is entirely possible to decide to sell your business and complete the transaction by the end of the year, although the timeline would be tight without an actively engaged buyer.  While it is not impossible to close if there is not already an actively engaged buyer, it should be noted that the timeline needed to generate interested parties could take one-to-three (1-3) months depending on how elaborate the marketing materials used to generate demand for your business are and how extensive the prospective buyers list is. 

Transaction timelines are determined by the length of time to arrive at a Letter of Intent as well as the diligence and negotiations that commence once a buyer is selected. In terms of efforts expended by the Company and their team, due diligence is the most time-consuming and intensive stage, though a well-versed investment bank can facilitate and prioritize needed items to accelerate and expedite towards closing.  For a transaction to close by the end of 2021, several critical steps need to be initiated:

1)    Assemble an Experienced Deal Team: An experienced deal team of M&A advisors, M&A experienced attorneys and accountants, and a wealth advisor are all necessary in helping you navigate the deal process. Specifically, M&A advisors and an experienced M&A attorney will prepare your necessary information and act as your advisor when communicating with the buyer / buyer’s legal counsel. Having an experienced deal team helps avoid delays that could postpone the closing of the transaction.

2)    Normalize Your Financials: Normalizing your financials is critical in determining the appropriate valuation and deal structure. The easier your financials are to understand, the less time is required answering questions and underwriting the transaction.

3)    Set Realistic Expectations and Define Objectives: Specifically, in the negotiations phase of the deal process, it is important to know what your goals are with the sale of your business; maximize cash at close, retain rollover equity, continued employment, or other meaningful conditions. Knowing your objectives and keeping expectations realistic are critical in experiencing a rewarding conclusion.

As mentioned previously, there are a multitude of factors currently contributing to a historically active M&A market. While interest rate outlook remains relatively constant and private equity firms / strategic buyers seem poised to continue deploying capital, the proposed increase in capital gains tax is the most likely factor to change by 2022. With the proposed increase, a business transacting for $50 million would result in taxation nearly double current rates (Proposed 39.6% vs Current 20%). The additional tax burden for a $50 million Enterprise Value business would be $9.8 million under the proposed change. Said differently, a $50 million business sold in 2021 is worth $9.8 million more than the same company sold in 2022 as a result of the tax change. A change of this magnitude should be taken seriously when considering a potential sale now or before the next administration.

In the current seller-friendly market, it is important to take the time to analyze your goals and objectives when considering a sale of your business. While every transaction is unique, a committed and motivated seller could close a deal before the end of the year, but time is of the essence.

For any questions, contact Ely Friedman at efriedman@vlcpa.com or 800.887.0434