The Dow Jones closed at an all-time high on Friday, September 19, 2014. And the NASDAQ and S&P were within ¼ of 1% of their all-time highs. As a result, corporations, private equity groups, and individual investors are flush with cash – trillions of dollars.
Where can they go with all that cash? Interest rates are so low that fixed income investments are not attractive. Whereas it’s typical to have a stock market correction (10% tumble) about once every 1 1/2 years, it’s been almost 3 years since the last correction. With international tensions in Ukraine, Russia, Iran and the Islamic radical group ISIS setting its sights on terrorizing the US economy, how much longer can the (stock market) good times last? Where can that cash best be used to achieve adequate returns on investment? The answer – business acquisitions.
The buyer demand for good businesses with good cash flow has always exceeded the supply of good businesses available for acquisition. However, with buyers having more cash than ever, the numbers of interested buyers can only increase. In addition, interest rates are extremely low, enabling buyers to finance their acquisitions at reasonable rates. However, the low interest rate window cannot remain open forever. The Federal Reserve policies will certainly result in an increase in interest rates over the next year or two. When that happens, buyer’s will experience an increase in debt service requirements which will ultimately result in reduced business sale prices for business owners.
What about the macro-economic environment? Well, quite frankly, it’s confusing. We have been in the midst of the most tepid recovery ever. Are we in a new normal? We’re improving, or so it seems, ever so slowly. But what does the future hold? With the 2016 elections creeping up, the existing international tensions and a President who is less than business-friendly, can we count on an improving macro-economy over the next few years? Or, might we enter another recession triggered by a political or international incident? It may be best to hedge your bets by counting on the latter, but who really knows?
In 2011, the SBA raised the maximum loan amount for the SBA 7a program to $5,000,000. Based on recently released SBA statistics, 7a loans through 9/5/13 vs. 9/5/12 were up 13.8% and 9/5/14 vs. 9/5/13 were up 11.0%. For the two year period through 9/5/14, 7a loans are up a whopping 26.3%! Good businesses with good cash flow can often be financed with SBA 7a loans with low down payments and low interest rates. These facts are indicative of the availability of funds to make a business acquisition in today’s environment.
What about taxes on the sale of a business? Are tax rates likely to be increased or decreased? Despite the recent increase in the capital gains rate, there always seems to be a push to further “tax the rich”. Again, who knows what might happen? But, in my opinion, the chances of future tax rate increases far outweigh the likelihood of a future tax rate decrease.
The optimal time to sell a business is when it has experienced three good years in a row. In our slowly improving economy, many business owners have had annual increases in cash flow since 2011. The problem is that one bad year can have a severe detrimental effect on business valuations. Unfortunately business values decline much faster than they increase or recover from a negative blip. To gain a further understanding, consider reading “Bad Timing – Waiting too Long to Sell” on the How to Plan and Sell a Business website.
So are all the “stars aligned”? In light of the paragraphs above, many are. But, a business owner must also consider their own personal readiness to exit their business, which should be balanced against the positive alignment of other factors. To learn more, consider reading “The Right Time to Sell Your Business” on the How to Plan and Sell a Business website.
Nevertheless, with the “stars aligned” positively in many respects, along with the potential for negative occurrences, it is a great time to at least think seriously about selling your business in this window of opportunity. The best time to sell a business could be right now!
If not now, when?