2020: Crossroads for Private Company Owners

2020 Crossroads for Private Company Owne.

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The new decade begins with a of dynamics confronting the private business sector with both opportunity and new challenges. 2020 opens with a combination of circumstances compelling fresh consideration of the question of whether to monetize and exit the privately-owned business interest. We’ll share in this narrative our perspectives on what this means for M&A transactions in 2020 and beyond and why the current outlook creates a fresh imperative for revisiting the question of selling the closely held business.

Economic Promise of the New Decade

The new decade of the 20’s offers exciting opportunities for middle market companies. Leading economists predict that advancing technologies, including those in automation, connectivity and artificial intelligence (AI) among others, will drive sustained productivity advances and create new markets for development and value creation. And they expect energy and other important commodities to remain abundant and relatively stable in price.[1] Financial capital created over the past decade abounds in the U.S and internationally, generating demand for higher yielding investment returns in an environment of continued low inflation and real interest rates. Finally, those dynamics continue to push value multiples higher not only for public companies but also for private-owned enterprises, particularly given a thin supply of private company opportunities entering the market.

The Election Cycle--Looming Tax and Regulatory Uncertainties

Against the backdrop of the new decade’s bright horizons lie outcome uncertainties of the current election cycle. Platforms of many presidential candidates promise major roll-backs in the 2017 tax reforms and substantial increases in tax rates for individuals, including proposed capital gains rate increases from 20% to 39.6% (and even 52% by one candidate!), along with substantial increases in the corporate income rate. Those, along with proposals to substantially increase and uncap payroll taxes, would place added burdens on the private enterprise. As well, changes in business regulations could create added headaches for the privately-owned company.

2020--Reasons and Favorable Conditions for Considering an Exit Transaction

High Demand—Plenty of Capital: There’s a ton of financial capital in the hands of private equity firms, family offices and other holders of capital seeking a place to invest for high returns. It is estimated that the U.S. private equity space alone has up to $1.5 trillion capital looking to be deployed, much of it into private sector enterprises. Adding to that is the appetite of larger U.S. and international businesses intent on enhancing their competitive position through strategic acquisitions. At the same time, substantial capital in the hands of non-bank lenders and the competitive money of regular banks exists to provide plenty of fuel for accomplishing transactions.

Decision Point—Stay or Sell: The factors described above create a rich environment for sellers of privately-owned companies, particularly those having a positive track record and strong forward outlook. The confluence of demand by deep-pocketed buyers (both financial and strategic) looking for higher returns coupled with business owners reaching retirement age and lacking management successorship, when stacked against the prospects of higher income taxes and more onerous regulation after 2020, leaves business owners at a decision point of continuing their ownership position or exiting through a partial or complete sale of their business.

Exit Transactions Require Careful Planning and Professional Guidance

An owner’s decision to exit their business presents the perplexing question of how to accomplish the objective. Ownership exit formats include a range of alternatives including external sales to strategic or financial buyers, internal sales to management (perhaps with an ESOP component) and many variations thereof. Each business will have unique attributes and owner objectives to be carefully evaluated in selecting the best approach, requiring the leadership and support of experienced professionals.

The professionals at CIP Capital have long standing experience in preparing middle market companies for sale, optimizing deal structures and leading the sale process forward to successful completion. Please contact us for a copy of our guide Structuring Business Liquidity Events and Ownership Transitions for an overview of transaction alternatives and our engagement management process. We would be pleased to discuss your questions and specific objectives.

CIP Capital Advisors, LLC is a Midwest-based M&A and capital advisory firm specializing in acquisitions, strategic alignments, buyouts and financings for middle market companies.

We welcome comments, inquires and further discussion—please feel to contact us at RBublitz@corpimprove.com or visit us at www.cipcapitaladvisors.com

[1] See Peter Morici January 2, 2020 https://www.washingtontimes.com/news/2020/jan/1/us-stocks-and-economy-poised-for-a-hot-decade/