Thinking about Testing the Market in 2022?

Pop art business owner Man with a lot of papers at a desk

2022 might just be the perfect opportunity to sell your business. The economy is rebounding, inflation has hiked up business values, and life is tentatively returning to normal. If you’re thinking of selling this year, you should know that to take advantage of beneficial market timing, your company needs to be attractive to the right buyer ASAP, or you’ll lose the moment. Selling in a slump makes it that much harder to get the sale price you need for your business.

Is Now the Right Time to Sell?

Before fielding offers, take a moment to consider whether now is the optimal time to sell. Reflect on your progress and consider the prospects of an even more lucrative future. Analyze the positives and negatives of selling, give yourself at least a day to think it over, and move forward accordingly.

If you decide now is the right time to sell, keep it a secret. Outside of your sell-side M&A team, no one else should know about your intent to sell this year. In particular, it is a mistake to reveal your plans to sell to your suppliers and employees as they might cut ties with your company before the sale, heading to greener pastures elsewhere. If this happens, it could jeopardize the final sale price and even the sale itself.

Fed Factors in 2022

There is much discussion about the possibility of a federal capital gains tax hike in 2022,2023, or beyond. President Biden campaigned for office as a critic of shareholder capitalism, yet he hasn’t taken punitive action against industry owners. Though the capital gains tax rate may increase in the next two years, it will likely remain at the same level moving forward. Another factor against a capital gains increase is that it’s a midterm year for the Senate. Bumping any taxes during such a sensitive time never bodes well for those seeking re-election.

The moral of this story is that patience has the potential to be a virtue this year for entrepreneurs looking to sell. Business owners who held tight through 2021 might emerge as the big winners during the next two years as the economy continues its U-shaped recovery and inflation boosts the value of businesses all the more.

The year ahead is also favorable for selling a business as it has superior “shelf space” from qualified buyers as plenty of deals failed to get off the ground in 2021. Those who patiently waited for the new year have a golden opportunity to select their preferred deal out of a longer-than-usual list of suitable buyers.

In short, 2022 is the perfect time for business owners to be a bit picky when choosing between offers. In the seemingly rare scenario where the capital gains tax rate increases sooner rather than later, the comparably high value of a deal landed in 2022 might offset any losses stemming from the increase.

Perform Self-Analysis

Spend some time analyzing your business before putting it on the market. Consider your company’s strengths and weaknesses. Focus on potential areas for improvement before moving forward with offers. Zero in on improvements that can be made without significant capital investment. Making those enhancements will set the stage for you to maximize the value of your enterprise when the time comes to sell. However, if your health is declining or you urgently need money, selling your company without improvement is undoubtedly understandable.

Start Preparing Now

Even if you end up holding tight through the first half of 2022 or even a bit longer, it is in your interest to start preparing your business for sale NOW. Anything can happen, so you should always be prepared for the perfect offer (even if it’s unsolicited), and you’ll have all the pieces in place for an efficient sale that proves mutually beneficial to both parties. Preparing a business for sale requires documenting operations, analyzing financial statements, and reviewing business tax returns.

Prospective buyers will seek information regarding your unique value offering, sales channels, current marketing initiatives, the supporting supply chain, inventory, and more. Even details about your current client base will help expedite the sale. When we’re engaged for M&A work, our sell-side team goes through financials with a fine-toothed comb to accurately conclude value. So we know a thing or two about making sure that everything, even the most mundane of documents, reflects the value of your business to the buyer.

Preparing a business for sale is that much easier with a blind business profile, also known as a teaser. This report anonymizes the business when presenting it to potential buyers, providing an opportunity to get a sense of the company’s value without revealing its name or publicizing your intention to sell. Bidders are professionally vetted after entering their offers. If you’re serious about selling, you should also think about procuring a marketing package known as a Confidential Information Memorandum, also known as a CIM. Such a document identifies the business and explains its unique financials, business operating model, and SWOT analysis to make it look as attractive as possible.

Sweat the Small Stuff of the Financials

Envision a scenario in which you put out feelers for a potential business sale and receive an offer that matches or even exceeds the value of the business concluded by your recent business valuation. Everything seems to be progressing just fine until the prospective buyer conducts due diligence. A close analysis of your company’s financials reveals you have comingled funds for several years. Allowing personal expenses to flow through your business is a major mistake, especially if you are considering selling at some point in the future.

Common thorny issues, like commingling funds, ultimately cloud the impression of your company’s finances, making potential buyers that much more hesitant to pull the trigger on a deal. Though reducing your business income with nuanced tax strategies is undoubtedly in your interest, it has the potential to sabotage a potential sale. Minimize your business’s taxable income too much, and you might reduce the valuation of your business to the point that you can’t get fair value for the enterprise.

The Bottom Line

Your company’s overall profitability is the number one determinant of whether your business sells for what you need it to or not. Perform Self-Analysis and channel your inner buyer. Make sure all your financial records are in order, and if the time is right in the market–you’ll be able to sell your company for top dollar. However, if you’ve taken steps to minimize taxable income or are aware of another factor that would make a buyer second guess themselves, be forthright about it at the outset of the bidding process, so you don’t waste time and energy reviewing offers that are eventually reduced after due diligence is conducted. Above all, it is in your interest to use your internal financials to identify non-business expenses related to the company that runs through the business. This approach creates an avenue for the finance specialists to add-back expenses that are not business-related to the company’s profitability, hiking the bottom line and business valuation all the more. If you have your house in order, so to speak, 2022 might be the perfect time for a successful sale.

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Dan is the Founder of Quantive and Value Scout. He has two decades of experience in leading M&A transactions. Additionally oversees Quantive's valuation practice and has performed thousands of business valuations.



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