As we move toward the second half of 2021, you can feel the change is on the horizon. Vaccination rates are picking up, and the economy looks to be ready to roar back as government stimulus flows and businesses reopen. The latest jobs report shows people are getting back to work in record numbers. Many of the business plans that were put on hold during 2020 are back in motion - and that includes the selling of businesses. However, one thing that has fundamentally changed since the pandemic is the type of businesses in demand. In the current market, manufacturing businesses are one of the hottest commodities, and sellers can command top dollar.
The reason is fairly simple: overall, manufacturing was a vertical that weathered the COVID pandemic well. While many other industries, particularly hospitality, travel and brick-and-mortar retail, suffered greatly, many manufacturing businesses continued to chug along as an essential business. Valuations remain strong, while other businesses that were significantly impacted in 2020 will have to prove that their value is still there, and that will require time. Meanwhile, there is a pent up demand on the buying side, with little on the market.
The Pacific Northwest has a somewhat different cross section of potential business buyers than other parts of the country. While there will always be private equity and venture capital organizations looking to add to their portfolios, the Seattle area in particular has a higher than typical number of high net worth individuals, due to tech stock vesting, looking to leave their corporate roles to become business owners. These are business-savvy individuals who are adept at leveraging financing and can aggressively pursue opportunities.
A recent client example shows how competitive the market can be. My client was a manufacturer in the construction industry who was ready to exit. The construction industry has often given investors pause, as it can be a cyclical industry and the 2008 housing crash is still in recent memory. But this sale drew wide interest, and the sellers received five competitive offers. Besides getting the value they sought, they also could choose a buyer that would continue their legacy and sustain the business they had built.
So we know that manufacturing businesses are in demand now, and the reasons that make them in demand will continue, so why contemplate a sale now? The new factor to consider is Biden’s proposed tax changes - that could make selling in 2021 even more advantageous than waiting until 2022 or beyond. Biden’s new tax proposal would effectively double the long-term capital gains tax from 20% to 39.6% for transactions over $1m. That means that some owners who wait another year or two may receive the same proceeds for the sale of their business, even if they are able to get a higher sales price by continuing to hold on to the business and grow it.
That’s a lot of work for no pay off.
Yet another reason to consider a sale in the near future: the current SBA financing landscape. While banks are scrutinizing investments very closely, the heavy asset base of manufacturers helps win favorable financing. Banks like a solid assets on the balance sheet of a manufacturer rather than the harder-to-quantify values of a consultancy or other service business, as there is something to lien against. And currently, there are good incentives for buyers to take out SBA loans, thanks to the CARES Act: buyers are getting their SBA Guarantee fee (3%!) waived and the first three months of P & I paid if they get a transaction done by September 2021. This is a huge incentive to get a deal closed quickly.
There has never been a better time to sell a manufacturing business, and it has also never been more important to work with a knowledgeable intermediary. Savvy buyers might want to use only less-than-representative 2020 financial records for a sale - an equally savvy intermediary can demonstrate why this is not a good data point for valuation. Every business is unique, and needs a thorough and customized review to get the full picture of their business’s value on the current market. I’m encouraging all manufacturing businesses who might be contemplating an exit in the future to at least explore the benefits of accelerating the timetable. I’m happy to schedule a phone call and see what the current market conditions mean for you.
So what is my advice to manufacturing businesses contemplating a sale within the next 5 years? Next weeks post will share actionable tips for you- stay tuned!
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