As part of celebrating our 15th year in business, we posted 15 articles I had written over the last several years. The number one article opened of the 15 was titled “How Long Does It Take to Sell Your Business.” When I saw this, I was concerned. I wrote that article over seven years ago and the financial and transaction world had changed, especially this year. As a result, I want to let readers know the new reality in the timing of selling your business.
Transactions are taking longer, at least in our industry, and there are several reasons. The most obvious are COVID-related delays. When Covid first put the brakes on businesses, we had several transactions delayed for 6-8 weeks because no one was sure what was going to happen and the risk of completing an acquisition and having all the employees out sick, was too great to not delay.
The second reason for delays was the banks. Lenders did not know how to handle companies with PPP loans and some banks required funds to be escrowed until the seller received loan forgiveness. Banks were also extremely bogged down with refinancing due to low interest rates. Many bank employees were working remotely, and we saw the biggest delays in transactions were related to banking issues.
Extending the tax deadline certainly helped the IRS cope with their backlog, however the delay in personal and corporate tax filings has led to delays in closing transactions. Buyers, as well as lenders, rely heavily on the financial reports which support the financial health of the seller.
Attorneys were also swamped, and legal turn-around time was slower than we typically see. Some of that was related to the volume of transactions and some due to the remote work environment. We waited three weeks to get some lien releases on vehicles in one particular transaction. The other item that slowed the process was getting state and local certificates, such as tax clearance certificates. We used work arounds such as escrow accounts as many state agencies were backlogged and could not deliver required certificates in a timely manner.
We would like to say that transaction times are returning to normal, however there is another factor we are dealing with and that is the new proposed capital gains tax laws. When this article is published, there will be around six months left in the calendar year. The latest proposed capital gains tax, which is expected to be effective in 2022, looks to make the federal long-term capital gains rate for top earners go as high as 43.4% from its current 23.8%. On a $5.2 Million gain in a sale, the tax would increase by $1,000,000. As a result, owners who had planned to retire in the next couple of years are looking to accelerate the process. Their thought is why should they work for free for the next couple of years. This has caused a dash for the doors and a sharp rise in companies looking to sell.
The great news is that tax incentives are still in place in 2021, interest rates are low, and there is plenty of cash available. In addition, as an essential industry, we have proven to have valuable businesses and most companies are coming off a great year financially. We see a strong supply of very active buyers and a great supply of sellers. The trick is how do you still get a deal done before the capital gains rates go up.
We offer the following advice for both buyers and sellers who are looking to get a transaction done this year.
- Get your financial statements in order and prepare to be able to get trailing twelve-month reports. Try to use a program such as QuickBooks that will convert to Microsoft Excel. That will speed the process.
- If real estate is being sold, as a seller, get real estate appraisals and environmental reports ASAP. The buyer typically has this done and pays for it, but not until late in the process and then it might be too late to save your 19.4% in taxes on capital gains.
- Line up a transaction attorney who has done deals in your industry.
- Focus your internal staff on providing the necessary information while still keeping the transaction confidential.
- Use an intermediary with extensive industry experience. They will know the short cuts and work arounds needed to expedite a transaction. They also have secure ways to help keep all information confidential.
Remember, many times it is a marathon to get a deal done. With an imminent increase in capital gains, this year it is a sprint.–Steve Abbate
Steve Abbate is managing director of Cetane Associates