Although most points discussed in this article pertain to all companies regardless of size, the article is primarily directed at middle-market companies, which are firms with transaction values between $5 million and $250 million.
2012 should be the best time to sell a company because of the likelihood that market conditions will be strong. They will probably continue that way through 2013 and quite possibly 2014. After that, the market could have problems. Expect a severe downturn that will have a devastating impact on the U.S. and probably global markets sometime before the end of the decade.
Its impact is likely to be far worse than the “great recession” and will be triggered by either a major event or a confluence of events. The impact will probably exceed any business collapse since the Great Depression. The economic conditions it creates are likely to remain for much longer than from the great recession. These conditions will have a significant damaging impact on the market value of U.S. companies. When it happens it will start suddenly and unexpectedly, just like in 2008. The public will express shock and amazement as they did then. No one saw that coming either.
Reasons
The following are why you should sell no later than 2014, and preferably by the end of 2012 or 2013.Acquisition pricing is very strong now. I would anticipate it will remain this way through the end of 2013.
It is likely President Barack Obama will be re-elected. In order for the administration to start significantly reducing the deficit, it will require more than spending cuts - it will necessitate an increase in taxes. These revenue-raising measures will primarily be focused on increasing the taxes on the wealthy, possibly significantly. One of the taxes almost certain to be increased is the capital gains tax. I expect it to be increased to at least 20 percent, if not 25 percent. If it is increased to 25 percent, your net after-tax sale proceeds have just been reduced by 10 percent. This is a sizeable hit.
Numerous private-equity buyers have a pressing need to invest capital promptly. Many of these funds received money from their investors in 2008 before the market crashed. These firms are now under tremendous pressure from their investors to get that money invested. This is driving them to invest that money quickly. For certain good companies they are willing to overpay if they have to, rather than risk losing the deal. This has produced some attractive selling opportunities.
Many U.S. corporations are flush with cash and have extremely strong balance sheets. This makes strategic acquirers very aggressive in the acquisition market and willing to pay strong multiples.
The stock market performance during the first two months of 2012 has been very good. This has been a contributing factor to an increasing level of optimism and buoyancy in the business community.
Interest rates are low and should remain low through the foreseeable future.
Catastrophes
Here is why the United States is likely to be faced with a catastrophic economic and financial scenario by the end of the decade. It will probably be much longer and worse than any we have endured in our lifetime.Although the European economy and financial mess has not been in the news as much recently, the problem is far from receding. The European Union is basically dysfunctional. There are too many countries that have to make decisions that then must be sold to their own disparate domestic constituencies. This negates the dramatic action necessary to begin extracting many of these countries, such as Greece, Spain and Portugal, from their disastrous situations.
It appears the E.U. is trying to defer the problem, hoping it will go away or they will discover a painless solution to it. The European banks are also in a much weakened condition. This will impact the world economy, as these banks have financial relationships with the world’s major financial institutions.
The combination of problems the United States faces including its huge budget deficit, the economic stimulus still required to get the economy back in a self-sustaining mode, the disparity of income between the “haves” and “have-nots” and the gridlock between the warring political parties. This creates a situation that becomes an almost intractable problem. The U.S. must find a way to bring its deficit under control during the next three years without doing anything precipitous that would push it back into a recession.
If these problems are not solved promptly, the country’s economy and financial markets will be in very precarious shape.
The emerging markets have driven the world’s economy for more than a decade. However, current problems and others on the horizon will diminish the positive impact of the emerging markets on the global economy. The growth in China has slowed. In addition, the four major banks there are all state owned.
The Chinese financial system is not as healthy as it appears to be. The slowdown in China’s growth will have a substantial negative effect on all countries, but especially the resource-exporting ones. Brazil will be one of the most affected, as China is its major trading partner. This, coupled with Brazil’s uncompetitive and dying industrial sector, could cause a major slowdown in Brazil. India is now facing its highest unemployment rate since 1983, its lowest growth rate in two years and an ineffective and corrupt government incapable of solving the country’s fundamental problems.
Overall, the emerging markets are not going to be the world’s growth engine they used to be. This could have a major impact on the developed world’s economies.
There are numerous geopolitical hot spots. The major ones are in the Middle East, including Iran with its threat of nuclear weapons. This is exacerbated by the potential of an armed conflict between Israel and Iran. There is also the nuclear threat in North Korea.
You should retain an investment banking firm that can position your company and guide and time its sale. You do not want to do this yourself or use a firm that doesn’t have unique and specialized acquisition market knowledge.
It is essential that you do not miss the window of opportunity that you have now to gain a top price for your company within the next two or three years.
George Spilka is president of George Spilka and Associates, a Pittsburgh-based national investment banking firm that has specialized in middle-market, closely held corporations since 1978. They have a broad-based service that advises clients through the entire acquisition process, and also in preparing a company for sale. Their client base has included a diverse group of construction, distribution, manufacturing and service companies. The company’s website is www.georgespilka.com. He can also be reached by telephone at (412) 486-8189, e-mail at spilka@georgespilka.com, fax (412) 486-3697 or by writing to Suite 301, Castle Town Square South, Allison Park, PA 15101.
