It’s Go-Time for Sellers: A 2018 Outlook for Mergers and Acquisitions
If you are thinking of selling your business, now is the time to get prepared and take advantage of the market.
During the first two months of 2018, we have seen valuation and EBITDA multiples continue to steadily rise, while at the same time monetary policies remain favorable for financing deals. While increasing interest rates later in the year may dampen activity, the following factors suggest that mergers and acquisitions activity will most likely rise this year.
Tax reform will spur investment
We expect the recent tax reform law to spur investment in the short- to medium-term for three primary reasons:
- The decrease in the corporate tax rate from over 35 percent to 21 percent will significantly reduce most companies’ tax bills, further increasing their cash-on-hand.
- The law has a low, one-time transition tax rate to incentivize repatriation of off-shore cash. We’ve already started to see this feature take effect as large firms make headlines with their plans to repatriate hundreds of billions of dollars.
- The bill allows full and immediate expensing of capital investments for five years, which will increase overall corporate investment activity.
In situations like these, companies look for investments to increase their returns or improve value creation of their businesses.
Continued economic confidence
By most accounts, the economy is doing quite well in both the United States and globally, and it’s expected to continue that trajectory. Investor confidence remains high despite equity markets being on a long-term growth streak, and consumer confidence rose more than expected in the first month of 2018 making it easier for owners to sell their business.
The upward trend in confidence may be attributed to the fact that unemployment is currently at a near 17-year low, hovering in the low four percent range. While this can have a short-term positive impact to confidence, the long-term impact could be negative to mergers and acquisitions because of concerns around an increase in inflation and payroll costs that could decrease profitability.
Large cash reserves will be put to work
Because of the combined catalysts of tax reform, ballooning cash reserves, continued economic confidence, and the prospect of increasing interest rates, it’s likely that companies will start to put their cash to work at a higher rate this year. The opportunity for business owners is to be prepared and take advantage of the increase in potential business buyers.
While this would indicate that it is a great time to be a seller, it is only a great time to be a seller if you are prepared.
In 2017, the median valuation to EBITDA multiple in United States mergers and acquisition transactions was 10.4x, up slightly from 2016. Multiples will only be pushed higher as activity picks up. While this would indicate that it is a great time to be a seller, it is only a great time to be a seller if you are prepared. With increasing multiples, buyers are being more diligent in their process, and sellers that are not ready have a higher risk of a broken deal, delays in closing, and valuations being adjusted downward in the process.
Interest rates will slowly rise
Interest rates are still relatively low, making it easy to finance deals in 2018. However, the Federal Reserve has indicated that they will make two or more rate increases during 2018. So, if you are ready to sell your business 2018 is a great time to do it.
How we can help
Private equity groups have cash that they need to spend, and they are looking to spend it soon. The combination of a growing economy, demand for acquisitions, and a good financing environment are pushing prices up. That makes 2018 a great time for those looking to sell. CLA professionals help business owners understand how to position their businesses for sale, preserve value throughout the process, and improve the certainty and speed of the close.