How to identify a market that is favorable to selling your business by considering factors like buyer activity, low taxes, the economy, and cheap debt financing.
If you’re thinking about selling your business, there is a lot to do internally, but you also have to make sure you are timing the market correctly. Strong market conditions can help you sell your business for a higher price with better terms. A strong market can also ensure that you lose less money to taxes.
To help you assess market conditions, this guide explains six signs of a strong market. If these signals are in place, you may want to consider selling now rather than waiting.
1. Recent sales and acquisitions in your industry
To get a sense of the marketplace, you may want to spend some time investigating recent sales and acquisitions in your industry. In particular, look for acquisitions involving HVAC or plumbing companies that are similar to yours in terms of size and services. Historic sales data can give you a sense of what’s happening in the market, and it can also shed light on the potential value of your business.
2. A high volume of sales in your industry
A lot of sales of businesses in your industry typically indicates that the market is hot. The high volume shows that buyers are interested in acquiring your type of business. This boils down to simple economic principles — high demand relates to high prices. But, if you wait too long, the market may become oversaturated with business owners who’ve also noticed the increased activity, and at that point, prices will start to go down.
3. An upward trend in sale prices
To help ensure you’re putting your business up for sale at the right time, look at the prices investors are paying for HVAC or plumbing companies. If you see an upward trend, that is an indicator that the market is going to be favorable for a sale.
Keep in mind, however, that sale prices only give you a general overview of the market. You also need to consider private details such as the structure of the deal. A mergers and acquisitions specialist can help you understand what was likely to have happened. Even if they don’t have private information about specific transactions, their experience positions them to make realistic estimates.
4. An increasing number of strategic acquisitions
Businesses acquire other companies for a variety of reasons, but in most cases, strategic buyers tend to pay more. A strategic acquisition is when a business or investor buys a company because they feel like it will provide a very specific benefit. The buyer may see the ability to expand its market, add new products, increase services, obtain intellectual property, or reap other advantages.
An upward trend in strategic acquisitions indicates that the market is hungry for growth. If your HVAC or plumbing company can enhance its operational strategy of potential buyers, you can leverage that to get a higher price.
5. Relatively low taxes
When you sell a business at a profit, you earn a capital gain. The Internal Revenue Service (IRS) requires you to report your capital gains and pay capital gains tax on them. When taxes are low, you get to keep more of your gains, and when they are higher, you face a higher tax bill.
For example, right now, the capital gains tax rate is 0% to 20% based on your income level. This means, if you earn $3 million on a sale, your capital gains tax won’t exceed $600,000. However, the government is currently considering increasing the capital gains tax rate to 25%.
When combined with a 3.8% surcharge on investment income, the rate may be as higher as 28.8%, and taxpayers who have income over $5 million may face an additional tax that brings their marginal capital gains tax rate up to 31.8%.
This type of rate change significantly affects the seller’s overall profits. In this tax environment, someone who enjoys a $3 million gain may face a capital gains tax of $750,000 to $864,000. Some of the government’s proposed changes could bring this bill even higher. If you want to maximize your earnings, you need to sell when the market has relatively low tax rates.
6. Low interest rates
A lot of the financing for mergers and acquisitions comes from external financing sources. When investors can obtain money relatively inexpensively, they become more likely to spend money. When assessing market conditions for a potential sale, you should also look at how interest rates are changing.
Slow and steadily increasing interest rates when the economy is strong are positive signs. They signal a potential rise in mergers and acquisitions activity. In contrast, if rates rise sharply when the economy is falling, this discourages mergers and acquisitions and indicates that sale prices are likely to drop due to decreased demand.
In addition to taking market conditions into account, you also need to consider the state of your business. Is your business ready to sell? Could you do more to drive up its value? A mergers and acquisitions specialist can help you identify the optimal time to sell your business, prepare your business for sale, and negotiate with prospective buyers.
Contact SF&P Advisors to talk about selling your business
At SF&P Advisors, we specialize in mergers and acquisitions with HVAC and plumbing companies. If you’re thinking about selling or just want to know more about the process, contact us. We can provide you with a free valuation of your company, talk with you about market conditions, and help you decide if now is the right time for you to sell.