While some business owners may be tempted to sell this year to take advantage of the incredible valuations that are being reported and avoid potential capital gains increases, ultimately business strategy and not tax strategy or timing the market should be the driving force behind a decision to sell a business, says Alyssa Brodzinski, a partner at RCCB.
“From a sell-side perspective, you really need an existing desire to exit the business, regardless of what might happen with the long-term capital gains rates,” Brodzinski says. “If you're not ready to sell, you should avoid rushing to make a decision.”
Accelerating a sale now that we’re halfway through 2021 could have consequences. For example, it might require a seller to be flexible around issues like due diligence because there's limited time to devote to it. Buyers, she says, are acutely aware that some sellers are looking to get out before year end in order to take advantage of today’s low tax rates, and they might be looking to get a deal as well.
Neil Cooper, executive partner at RCCB, says deals often move at their own pace, regardless of any attempts to accelerate them. But there are ways to get them to move a lot faster.
Getting organized is key on all sides, he says. That means having financials and financial statements ready for a quality of earnings review is one of the key timing drivers of due diligence.
“Being ready as early as possible is always a good idea,” Cooper says.
Speed, however, can sometimes mean inadequate planning. When that’s the case, often not all key deal points are thought through, which can sometimes lead to deals taking detours or zigzagging through multiple iterations, adding to time and cost or even in some cases being called off altogether.
“We've certainly seen that with some due diligence issues cratering or slowing deals down,” Cooper says. “So it's important to think through what aspects of my business are going to be attractive to an acquirer? What might they be concerned about? Does that make any difference if they’re a strategic buyer versus a financial buyer versus a minority investor? And what might they think about? And what can we do in advance of getting the whole process started so that we're ready to go when they hit that issue in due diligence or we can avoid that issue in due diligence entirely by doing something before we dive into the deal. It's easier said than done, and sometimes it's hard to predict what acquirers are going to do.”
He says sometimes the best strategy in negotiating at any stage of a deal is to stop talking and allow different perspectives to emerge.
“And we've seen that work in any number of cases where it seems like there's an insurmountable issue ,whether it's on price or a due diligence issue or some other deal term, whether it could be employment agreements for executives or structuring of the reporting relationships after the deal, and it can sometimes just be good and in deal for people to sort of take a step back and think about it,” Cooper says.
So, he says, if you're really rushing and everybody's committed to a certain date, it can make negotiations more difficult.
Brodzinski and Cooper spoke on the Smart Business Dealmakers Podcast about the current deal environment, the tradeoffs that come with speed, and they offer tips on putting together a deal team. Hit play on the podcast below to hear the full conversation.