Business owners who run their own companies mostly have the majority of their personal net worth tied to their illiquid business. The process of converting that illiquid wealth to cash while you transition the company’s ownership to a future CEO is complex. Within the matrix of decisions that an exiting owner needs to make for this future transition is the critical factor of timing. And, 2013 may be the opportune time for you to begin planning your business exit. Listed below are the top five reasons why you should consider planning your exit in 2013.
1. There is Still Good Demand Today for Solid Businesses to Be Purchased by Private Equity Groups
On the topic of financing for acquisitions and active buyers, it is important to highlight that certain types of buyers are continuing to purchase solid companies today. In fact, private equity groups need to ‘spend’ their investors’ money or they have to give it back. This puts buying pressure on these private equity groups because they, as a group, will begin to lose more and more of their financial / investor commitments this year if they fail to make purchases. If you can still catch this wave of buyers you may be advantaged in achieving a higher value for your exit (this is particularly true for owners who are leaning towards an outside sale for their exit).
2. Trillions of Dollars of Corporate Cash are Available for Acquisitions
Publicly traded companies are currently holding trillions of dollars in cash on their balance sheets. Similar to private equity, CEOs are supposed to return cash to investors if they cannot put it to productive use in their businesses. Because many CEOs would prefer to build their companies than return corporate cash, it seems like it is only a matter of time before this cash makes its way into the purchase of privately-held businesses. If you are prepared for this activity, you will likely get a better result when this buying begins.
3. The Tax Code Won’t Get any Friendlier
Now that the 2012 American Taxpayer Relief Act has been passed we have already seen a shift in the tax code making it more burdensome for those most successful in our economy. This includes business owners that have worked a lifetime to build a valuable business entity. And, since the United States is burdened with $16 trillion in debt, we are likely to see tax hiking continue, particularly for those who are going through a large liquidity event, such as a business sale. As an example, for upper-income taxpayers there has already been one increase in the long-term capital gain tax rate (now 20% versus the old rate of 15%), as passed in the 2012 American Taxpayer Relief Act. It is hard to predict what further tax code changes will look like, but again, if you are early with your planning, you may be able to take advantage of certain tax benefits that could be going away with further tax code overhauls.
4. The Supply and Demand of Exiting Owners is Set for a Shift
The passing of 2012 marks one more year that the majority of baby boomer business owners held onto their privately-held business. This means that over the next five (5) to twenty (20) years, millions of these owners will be looking to exit their business via a sale to a future owner. Simply put, at some point in this cycle there may be more sellers than buyers in the marketplace. Therefore, in order to stay ahead of the curve, you might consider 2013 as a starting point for your exit planning.
5. If We Survived the Mayan Calendar, Then Maybe There is Hope for the World
Many years ago, the ancient Mayans predicted the world would come to an end in 2012. The Mayan calendar measured cycles, or bactuns, in approximately 5,000 year increments. 2012 marked the end of a 5,000 year cycle and, hence, the beginning of another. While some speculate that the Mayan temples were warnings to future generations of this pending doom, obviously we now know this was not the case. However, it is compelling to consider that with such a fast-changing world, perhaps there was something that these Mayans did know about rapid change and its impact on our now global, interconnected business world.
At least if you have your illiquid business converted into cash, you can choose to store your money in cash, gold, stocks and bonds, mutual funds, foreign investments, real estate, another business, or even under the mattress. However, no matter what your forecast for the future, as long as your money remains illiquid, your options for changing the character of this wealth to account for a fast-changing world continue to be limited.
This newsletter was written to inform, educate, and provide a template and some rationale for thinking about your plans for an exit from your business. It is our hope that this objective was met and that you are further along in your thinking about forming an exit plan in 2013.
N. Perry Moore, CFP®, ChFC®
Director of Wealth Planning
PAYNE WEALTH PARTNERS, INC.