Intelligent Advice

Avoiding a Doomsday Scenario

By John Weber

As a kid, we watched many popular TV shows, and while I remember the shows, I am not able to recall the plots.  An exception to this is the original Star Trek series which contained dramatic struggles that could be compared with classics like Shakespeare or Homer.  In the Doomsday Machine Captain Kirk flew a disabled starship into the maw of a gigantic, planet eating weapon on a virtual suicide mission to save the universe.  I will not tell you how it ended, but, spoiler alert, the series continued, so you can probably guess!

What does this have to do with selling a business?  Nothing, unless you compare the specter of inflation, increasing interest rates, new tax legislation, more government regulation of business, accelerated government mandated reductions in CO2 emissions, and a reversing of trade policies impacting our reshoring efforts as a doomsday scenario for those looking to sell their businesses.  Predicting if or when each of these ‘headwinds’ will occur, or the exact outcomes is not possible, but there are signs that each is already percolating or will soon be taking place:

  • Inflation – Sticker shock! – look at gasoline and food prices, the prices of building materials, or the cost of buying a home.
  • Taxes – President Biden’s tax proposal calls for an increase in Capital Gains tax from 20% to as much as 39.6% and for an increase in the corporate tax rate from 21% to 28%.  No one can predict what will ultimately be passed by Congress, or when, but odds are that taxes will increase across the board.
  • The money for the trillions of dollars that have been spent or appropriated for Covid-19 relief and for other projects must be raised by the Fed.  To sell that much ‘paper’ chances are they will need to raise the rates to entice investors to continue backing a more leveraged United States of America.  This, or perhaps some other unseen or unpredicted shock to the financial system will eventually cause interest rates to rise.

We have already seen a sense of urgency by sellers rushing to get into market so they can close by the end of the year.  If we consider that the process of selling a business can take 6-9 months, it is essential right now to take concrete steps to get your business into the market to have a chance of a 2021 closing.  Given the amount of activity in anticipation that these changes will hopefully not take effect until after the first of the year next year, we predict that most of the professionals serving the M&A market will be extremely busy leading up to year end, which could make it more difficult to get transactions across the finish line prior to midnight on December 31st, 2021.

It can be difficult to have perfect timing with regard to avoiding a tax increase or selling at the top of the market.  But, if you are thinking that this might be the time to sell, then there is no time like the present (and we really mean this) to consider starting the process.  We are ready to assist when you are ready to begin the process.

Published by Water Street Advisors in
May 2021

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