After nearly a decade of tumult and uncertainty, the U.S. economy has not only stabilized — it’s growing. Finally out of the winter of recession, unemployment rates are at their lowest point since June 2008, consumer spending and growth predications are both looking sunny, and Mississippi State Economist Derrin Webb predicts strong revenues and GPD growth for the Magnolia State.
The business-for-sale market is also feeling the boom. Last year saw a record- breaking number of transactions in addition to businesses selling for more, with median sales prices rising by 3 percent in 2014 compared with 2013. And 2015 is proving to be just as strong.
It appears to be a seller’s market, but there’s no guarantee for how long it will last. Timing is everything when it comes to selling a business, and you never know when there could be bad weather on the horizon.
1. Tax increases: Tax increases and shifting regulations are often some of the biggest challenges for small and mid-sized businesses. There are currently federal proposals to raise the top marginal rate on capital gains, as well as subjecting more varieties of capital gains to taxes.
There were two tax-cut plans recently under consideration in the Mississippi state Legislature: one to phase out the state’s income tax by 2030 and the other to phase out corporate franchise taxes in 10 years. While it might seem advantageous to wait for these tax cuts before selling your business, they are not a sure thing. It’s important to remember even if they are eventually passed, they may not have a noticeable effect for a decade or more. With these tax reforms pending, business owners should consult with their accountants and investment advisers on the after-tax value of their business in current, higher and lower tax scenarios to determine the best time to sell.
2. Interest rates: As the economy continues to grow and strengthen, interest rates are likely to rise. With rates at a near-zero benchmark rate, the Federal Reserve is expected to lay the groundwork for its first iterest-rate hike since 2006. While the central bank’s open market committee suggests an immediate rate hike is unlikely, there are indications they may boost rates later in the year, as long as inflation remains near the Fed’s 2 percent target.
Higher interest rates means higher costs for doing business. And as debt becomes more expensive, servicing it will take a bigger bite of your company’s revenue, making it less attractive to potential buyers.
3. Saturated market: The baby-boomer generation, those born between 1946 and 1964, has founded more businesses than any other generation. According to the last census, the South is home to the largest number of baby boomers in the country. In Mississippi alone, nearly 13 percent of the population is over 65 years of age. These high numbers mean the M&A market will soon be flooded with baby boomers looking to retire and sell their businesses.
There are about 4 million U.S. companies owned by baby boomers, which comes to about 66 percent of all companies in the country with employees. Estimates suggest 65 to 75 percent of small businesses in the United States will be up for sale in the next five to 10 years as a result of this mass baby boomer exodus. With a larger supply of business than possible demand, business owners would do well to take a potential value decrease into account when creating a timeline to sell.
Knowing when to sell your business can be tricky. It’s crucial to understand the risks and rewards of selling or holding a business, all the while considering current and future conditions. One thing is certain: The 2015 market is primed for transactions. The economy may be sunny now, but, if there’s one thing the recession taught us it’s that a booming market, like the weather, can always turn.
Posted on June 15, 2015
by Oaklyn Consulting