Letting Wall Street Activity Change Your Exit Strategy? Big Mistake
Due to the recent gyrations in the stock market, Fortune magazine polled a few leading economic forecasters about their thoughts on the odds of a double-dip recession. A recession is classically defined as two consecutive quarters of declining GDP (gross domestic product). The general consensus among those surveyed was that although the economy has slowed, the chances of a second recession in the near future are very low. Fortune writer Mina Kimes opened a recent article this way:
“As stocks took a blistering dive this week, Wall Street economists scrambled to readjust their forecasts of the likelihood that the economy is headed for another recession. In a matter of days, a consensus quickly emerged: Most strategists now place the odds of a double dip at [only] 30-40%.”
I took the liberty of adding the word only in the above quote. It seems that a second recession is a foregone conclusion to most of the folks in the business press, especially those seen on nightly television. Based on the experts that Kimes spoke with, this is not the general consensus among people who make these predictions for a living. Economists at Goldman Sachs, Bank of America Merrill Lynch, Standard and Poor’s, and Deutsche Bank all have the odds of a secondary recession between 30-40%.
Of course these people are much better at telling us when we were in a recession than when a recession is coming. However, very rarely has the stock market predicted a recession. I was surprised to learn that, according to Fortune, “there have been 30 market declines of 15% or more since the Great Depression, and only two led to recessions” (emphasis added).
Think about that data as you watch the market gyrate over the next few weeks. If you own a middle-market business, your focus right now should be growing your company, not watching the daily drama unfold on Wall Street. Too often we encounter business owners who mistakenly alter their business plans based on the activities on Wall Street. In fact, we meet middle-market business owners who actually put their exit plans on hold because of these wild gyrations.
What Will Really Impact the Sale of Your Company?
Wall Street fluctuations do not control middle-market deal making as much as you might think. Interest rates and capital gains taxes both have a much bigger impact on deal closings than Wall Street in our niche. History has proven over and over that when interest rates are low and/or cap gains taxes are low, deal volume increases.
Where are both cap gains taxes and interest rates right now? They are both at historic lows. This is why we have seen a steady increase in deal making activity since about the middle of last year. We firmly believe that if you own a middle-market company you need to seriously consider taking chips off the table by selling your company. The next 12 to 18 months could provide you with the best opportunity in years to find an optimal buyer for your company.
Why you ask? Because chances are really good that interest rates have nowhere to go but up. They can’t get any lower—that’s for sure. Also, we know that unless Congress acts, on January 1, 2013, the amount you pay in capital gains taxes will increase by almost 60%. Odds are good that interest rates and cap gains will simultaneously begin to rise around the same time.
What Do Higher Cap Gains Taxes and Interest Rates Mean?
Higher cap gains taxes and higher interest rates will do two things: lower your company’s valuation and reduce the amount of money you retain at close. Space does not allow me to expand in detail on why. Fortunately Generational Equity holds seminars around the country about how and when to exit your company for the most profit. At our full-day conference, we examine the entire M&A process and focus a great deal of time explaining the relationship between deal closings and interest rates and cap gains taxes. I would highly encourage you to attend.
If you are too busy to attend a full day seminar, we have also created a webcast that summarizes it in about 45 minutes. If you would like to view the webcast, you can do so by clicking here.
No matter what, the important takeaway is this: Don’t let wild swings in the stock market impact your exit plans. Exit when the time is right based on M&A market trends, not stock market ups and downs. Given current interest rates and cap gains taxes, now is a really good time to get moving on your exit planning strategies.
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