It is during economic downturns that many fortunes are made and lost.  We can scan our brief history in America to find many great companies having been formed or significantly shaped during economic downturns such as IBM, GE, Federal Express just to name a few.  Unfortunately during these times we most often remember the businesses and great wealth that was lost.  The difference between success and failure in times like these is often a matter of perspective, timing and the ability to act decisively.

2009 will be a great time for many business owners to pull the trigger on their ownership transition plans.  I repeat -- 2009 will be a great time for business owners to pull the trigger on their ownership transition plans. 

While the reduced leverage and bank financing is having a measurable impact on purchase multiples, it is not the only factor to consider when deciding to sell your business. 

In my recent conversation with an industrial equipment manufacturing company who primarily sells to European and Asian construction companies it became apparent to them they should consider selling their business for the following reasons.

• Capital Gains Rates:  Most economists and business leaders will agree that the federal bailouts and the Stimulus Package will lead to higher taxes.  The taxes will be primarily felt in an increased Federal capital gains rate of at least 30% which is twice the current capital gain rate of 15%.  If history repeats itself, the change in capital gains rates will be implemented prospectively from the point of the new Congress's announcement.  Many pundits believe that this change could occur as early as the 4th quarter of 2009, reducing proceeds from a future sale. 
• Business Performance:  For most businesses the past three years of historical performance was strong and showed consistent signs of profitability and margin growth.  If you recall the economic downturn of 2001, the volume of M&A activity did not show signs of significant growth until 2004.  One of the contributing factors to this delay is that the corporations did not have enough track record of performance to support a reasonable valuation from the seller's perspective.
• Currency Exchange Rates:  The likely buyers for this business are European based equipment manufacturers.  The favorable Euro to US Dollar exchange rates of 1.3 to 1.  This exchange rate enables Euro-based buyers to be able to pay more than its US counterparts. 
• Available Buying Capital:  Over the past 5 years, private equity funds have raised an unprecedented amount of capital.  At the beginning of 2009, private equity funds have over $12 billion dollars of committed capital that must be deployed to purchase companies or returned to their limited partners.  Since private equity funds receive management fees on the amount of the committed capital, it is unlikely that they are going to voluntarily return capital to their limited partners.  We expect this significant pool of capital to fuel acquisitions of businesses with promising outlooks throughout 2009.

The media-driven feelings of fear and uncertainty have chilled American business.  The ability for business owners to filter the rhetoric and look with self assurance into the future is important.  This may be the ideal time to act decisively in selling part or all of your business or finding an equity partner to help your business emerge stronger from this market downturn.  A quality M&A advisory firm can be critical in assessing the valuation and market factors that may be affecting your business in these changing times, and structuring a creative transaction to maximize shareholder value.

Tom Zucker is the President at EdgePoint Capital Advisors, a middle market merger and acquisition advisory firm.  EdgePoint Capital Advisors provides sell-side advisory, buy-side advisory and refinancing services to privately held businesses and their owners.  Tom can be reached at (216) 831-2430.