Are there any benefits to selling my company in 2022 even if capital gains taxes increase?

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By John F. Herubin
Managing Director

EdgePoint, like many in the investment banking world, has been deluged during the first half of 2021 with sometimes frantic calls from business owners looking to sell their business during 2021 in order to beat an anticipated Federal capital gains tax rate increase effective in 2022.  By the time you read this article, the likelihood of completing a deal during 2021 will be very small barring some unique circumstances. 

Before despair sets in after the realization that a 2021 sale is unlikely, there are a number of circumstances that might bode well for a 2022 sale despite a capital gains tax increase (advisors often caution against letting the “tax tail” wag the proverbial business dog).

Our leadership team in conjunction with market participant discussions has considered these circumstances and concluded any combination of the following could be potential benefits to a 2022 seller:

  • Better “shelf-space” or attention from qualified buyers – since there will be a mad-rush to complete a likely record number of company sales by year-end 2021, many qualified private equity and strategic buyers have their pick of deals on the market and can be choosy with what they decide to pursue.  So as not to be lost in the shuffle of this activity, a seller who is not entirely tax-focused can wait until this “pig in a python” is processed and be part of a smaller seller market in 2022 and garner more attention from a larger universe of focused qualified buyers.
  • Capital gains tax rates may not be increased as high as speculated – a congressional compromise may mute the ultimate increase and not make the financial pain as severe as anticipated.
  • Waiting while improving financial performance might result in a higher value – with each succeeding month post-COVID that is better than the prior year-over-year performance, pushes any negative COVID impact further in the rearview mirror and improve trailing twelve-month financial performance generate a potentially higher value.
  • Use the additional time to better prepare the business for sale – owners can use the additional time going into 2022 to identify and improve operations, financial records, or personnel issues, and possibly grow through a strategic acquisition.  Any combination of the above could enhance value.
  • Improve performance sufficiently to break through EBITDA thresholds that produce higher values – businesses nearing the $3MM, $5MM, and $10MM EBITDA thresholds will likely see greater EBITDA multiple values in 2022 than selling below these amounts in 2021.
  • Better access to qualified deal professionals – as mentioned before, many investment bankers, attorneys, and accountants that are necessary to completing the sale process are operating at full-capacity and likely beyond as the year progresses.  These professionals are critical to a successful deal and their availability and the sellers’ access to them will likely improve in 2022 thus contributing to greater outcomes.
  • Abundance of capital and financing will not disappear at the close of 2021 – In spite of the record-setting deal volume likely to occur as 2021 concludes, there will still exist a record amount of private equity, corporate-held cash, and financing options available to buyers to continue looking for quality deals in 2022.  Not everyone will have found the deals they wanted in 2021 and that bodes well for potential sellers in 2022.
  • Clients not solely motivated by taxes - we have several clients who are tax agnostic and believe they have taken sufficient profits out of the business for many years and are not singularly concerned or focused on the tax ramifications of a sale.  If the timing is right for them personally, 2022 may be the perfect time for them to consider a sale process.
  • (Outside Chance) – No tax increase agreed upon or implemented – we’ve heard commentary/speculation that Congress has historically been hesitant to enact tax increases in a heated election year.  With mid-term 2022 elections looming, there’s the slight possibility that no capital gains increases are enacted, and the “window of opportunity” is open again during 2022.    

Based on the above, potential owners should not despair if they feel they have missed the “window of opportunity” to sell in 2021 that is often discussed in the current environment.  We are anticipating that 2022 will see a robust level of activity for sellers (and buyers) even if not quite to the levels ascended in 2021.   

© Copyrighted by John Herubin, Managing Director, EdgePoint Capital, merger & acquisition advisors. John can be reached at 216-342-5865 or at jherubin@edgepoint.com.

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2000 Auburn Drive, Suite 330, Beachwood, OH 44122 | Phone: 216-831-2430, Toll Free: 800-217-7139

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