With the economy expanding in Canada, many owners are wondering if this is the year to consider selling the business. In most of the major regions of Canada, there are five specific reasons why it would make sense to sell sooner than later.
There are many factors that determine the best timing for selling a business — the financial condition of the company, valuation, growth cycle, profit history, and the current market. Usually, the best time to obtain the highest price occurs when sales and earnings are good and trending upward with a history of good performance. This gives buyers more confidence in projected future earnings.
Value is dynamic and proper timing makes a big difference in the prices paid for business acquisitions. External factors such as the economy, industry trends, stock market volatility, competition, investor confidence, interest rates, and geopolitical considerations are cycles of constant change that impact value.
Internal conditions within a company also change. Often in combination with external factors, sometimes independent of those factors.
So how should you determine if 2020 would be the right time for you to sell your business? The following are five factors for Canadian business owners to consider.
First, get a business valuation to determine what your business is worth in the current market. This is an initial step in determining if a sale would meet your objectives. Our group provides this as a courtesy. Most advisors will not.
Secondly, understand that the current status of the mid-market business market place in provinces like Ontario is one of the best in Canada and policies are in place for continued prosperity and growth in the Province. We are going to pop up on a lot of radar screens as a place to relocate or expand for businesses. Ontario gained more residents than any other Province as the recession deepened in 2008 and early 2009 as job seekers migrated to one of the nation’s strongest labor markets. The Toronto metro area enjoyed the second largest population growth than any other city in 2009 and has the second-highest number in Canada. It has doubled in 2018.
As a third point: Buyers in every category are looking for alternatives to traditional investment avenues. They are looking for stability, better predictability, and control. Business acquisitions offer all of these and can also offer a better return than traditional investment opportunities, Ontario and Alberta as a whole, are prime targets because of future economic expectations and long-term outlook.
The fourth item is that the capital gains tax rate is presently at historic lows at 15%. However, effective Jan 1, 2020, this rate will increase, possibly by as much as 69%. Therefore, business owners considering a sale should sell by Dec 31, 2020, in order to keep more of their proceeds. In the United States, as reported in the Wall Street Journal Nov 12, 2019, Congress is planning “a 5.4% surtax on incomes above $500,000 for individuals and $1 million for joint filers” to fund health care reform, which will affect both capital gains and dividends. If passed, the surtax goes into effect March 1, 2020, the same day the tax rates of 2001 and 2003 are set to expire. The current capital gains tax rate would rise to at least 20% — 25.4% with the surtax. This represents a 69% increase overnight. This does Trump include any changes that might come from increases in state and local tax rates. Canada to follow with restrictions on the small business capital gains exemption.
A fifth point, and most importantly, even in our current economy, buyers exceed sellers and we have a robust small business exit market for now. The time will come when the flood of baby- boomer business owners ready to sell will outweigh the ready buyers.
Fueling the market are the different categories of buyers looking to put their money to work by acquiring profitable businesses in areas with a good economic future:
- Early baby-boomer corporate retirees
- Management-level refugees who have suffered a downsize who typically have severance pay or pension funds to invest, and are looking to go into business for themselves. The stock market, or putting money in the bank, does not look attractive to these corporate refugees at this time in their lives
- Foreign buyers seeing U.S. businesses as investment opportunities while the dollar is valued lower against their own currency.
- 30-something up-and-comers aggressively buying and building.
- Strategic Buyers, both public and privately-held companies, are actively acquiring smaller firms as part of their strategy for quick growth and innovation. (Merrill Data site – Sept 2019)
- Investment Buyers, such as private equity groups, “are going down-market” (Merrill Data site – Sept. 2019) and are seeking add-on acquisitions in the lower middle-market for their investment portfolios.
- Blue-collar workers who have been laid off are also looking to “buy a job.”
If internal conditions, both business and personal, are right, 2018 is the time to consider selling a privately-held enterprise. We realize that the decision to sell is neither purely tax-driven nor even a purely financial consideration. Business sales are usually motivated by personal factors.
However, because it can take anywhere from 6 to 12 months on average to sell a private company, we suggest that business owners considering a sale prepare now so they can take advantage of this exceptional, impermanent window of opportunity.
With all categories of buyers in play, historic low interest rates with the government working to make credit more readily available, the capital gains tax rate the most favorable in 30 years, and the positive future outlook of the Texas economy, it appears to be an excellent time for business owners in Texas to explore their opportunities for exit.
Mark Borkowski is president of Toronto based Mercantile Mergers & Acquisitions Corp. www.mercantilemergersacquisitions.com