There are many reasons why middle market owners wanting to sell their companies during the next ten years should consummate a sale no later than 2014, preferably sooner. Although most points discussed in this article pertain with equal relevance to all companies regardless of size, the article is primarily directed at middle market companies, which are firms with transaction values between $5 and $250 million.
I am more optimistic about the prospects for the short and intermediate-term (the next two to three years) acquisition market than I was last year, when I syndicated an article on the then current state of acquisitions. 2012 should be the best time to sell a company because of the likelihood that market conditions will be strong. They will probably continue that way through 2013 and quite possibly 2014. After that, the market becomes problematical. However, I am much more negative about the long-term than last year. I expect a severe downturn to occur that will have a devastating impact on the U.S., and probably the global, acquisition and financial markets sometime before the end of the decade. Its impact is likely to be far worse than the Great Recession and will be triggered by either a major event or a confluence of events. The impact will probably exceed any business collapse since the Great Depression. The economic conditions it creates are likely to remain for an extended period of time, much longer than from the Great Recession. These conditions will have a significant damaging impact on the market value ofU.S. companies. When it happens it will start suddenly and unexpectedly, just like in 2008. The public will express shock and amazement as they did then. No one saw that coming either.
The major reason why these significant negative events always occur so unexpectedly is because it is in none of the major financial firm’s self-interest to forecast catastrophic economic or financial market conditions that are on the horizon. It would severely impact their business. And, as we all know, the major financial firms think first and foremost of their self-interest.
Why You Should Sell Promptly
The following are certain reasons why you should consummate a sale by not later than 2014, and preferably by the end of 2012 or 2013:
- Acquisition pricing is very strong now. I would anticipate it will remain this way through the end of 2013.
- It is likely there will be a second Obama Administration. In order for them to start significantly reducing the deficit, it will require more than spending cuts, as there are not enough spending cuts to make without harming the very structure and fabric of the U.S. Correspondingly, it will necessitate an increase in taxes. These revenue raising measures will primarily be focused on increasing the taxes on the wealthy, possibly significantly. One of the taxes almost certain to be increased is the capital gains tax. I expect it to be increased to at least 20%, if not 25%. If it is increased to 25%, your net after-tax sale proceeds have just been reduced by 10%. This is a sizeable hit.
- Numerous private equity (PE) acquirers have a pressing need to invest capital promptly. Many of these funds received money from their investors in 2008 before the market crashed. That money basically sat idle for 2½ years. The PE firms are now under tremendous pressure from their investors to get that money invested. This is driving these firms to invest that money quickly. For certain good companies they are willing to overpay if they have to, rather than risk losing the deal. This has produced some attractive selling opportunities.
- U.S. corporations are flush with cash and have extremely strong balance sheets. This makes strategic acquirers very aggressive in the acquisition market and willing to pay strong multiples.
- The stock market performance during the first two months of 2012 has been extremely good. This has been a contributing factor to an increasing level of optimism and buoyancy in the business community.
- The interest rates are low and should remain low through the foreseeable future. I don’t anticipate the Federal Reserve deviating from its stated policy of keeping interest rates low until 2014. The majority of the Fed Governors don’t feel it is worth the risk to implement a restrictive monetary policy, as they believe that the premature implementation of a restrictive monetary policy was a major factor causing the depth and length of the Great Depression.