In 2020, manufacturing merger and acquisition activity fluctuated like a transverse wave, alternating from crest to trough with each passing quarter. Fear that COVID-19 would make quality buyers elusive led many business owners to put their plans to retire and sell the company on hold. But the manufacturing industry has been incredibly resilient in the face of uncertainty and hardship. So, despite initial fears, it’s a seller’s market for manufacturers.
According to the International Business Brokers Association’s (IBBA) Market Pulse Report, engineering and manufacturing companies are the most highly sought-after sectors in the lower middle market, with sale multiples and pricing remaining strong. In the third quarter of 2020, those in the $2-$50 million range sold at 100% of list price.
If you’ve been thinking about selling your company, or you put your pre-pandemic plans on hold, there are a few considerations that may sway your decision. For some, there’s no time like the present to put your succession or exit plan in motion.
Reach the Shore Ahead of the Silver Tsunami
While the results of the 2020 Census data have not been released, the US Census estimates the baby boomer population to be more than 73 million; furthermore, around 10,000 baby boomers reach retirement age every day. Bureau of Labor Statistics (BLS) projections indicate that number will continue to rise by 3.1% each year until 2030, when all baby boomers will have reached at least 65 years of age.
The pandemic doesn’t appear to shake the average Boomer’s plans for retirement. For some, it has accelerated those plans. In the third quarter of 2020, 3.2 million more boomers retired compared to the same quarter in 2019. Drawing the attention of a prospective buyer could become increasingly challenging as more and more Boomers put their businesses on the market.
Capitalize on Industry Demand & Consolidation
Because so many manufacturers have been hesitant to sell, pent-up demand has grown among buyers. Consequently, manufacturing businesses have become a hot commodity, and sellers are well-positioned to command top dollar, especially those on the leading edge of digitization.
Over the last decade, manufacturers have progressed through various stages of digital transformation. The pandemic accelerated industry-wide adoption of new and advanced technology. Manufacturers that implemented digital solutions pre-pandemic fared better than manufacturers that were slower to adopt changes. And private investors are taking notice as they look to acquire resilient brands and assets that will enhance their current operations.
Avoid Higher Tax Liabilities
In addition to raising the maximum individual income rate to 39.6%, Biden’s tax plan proposes increasing the maximum corporate income tax rate to 28%. When higher corporate taxes lead to a smaller share of the return on a potential investment, investors may become more conservative. The argument is, the higher the cost of capital climbs, the more likely investors are to forgo investments because they can no longer justify the risk.
When the owner of a private manufacturing company sells off shares to another private buyer, the owner is subject to capital gains tax. Biden’s plan proposes capital gains and dividends on incomes above $1 million be taxed at ordinary rates and proposes the top rate be increased to 43.4% (39.6% plus the 3.8% Net Investment Income Tax). There’s still room for negotiations on the final rates. But the likelihood for rate increases is there, making it worth your time to consider the possible effects on the sale of your business.
As the Practice Leader of ARB’s Manufacturing Advisory Services Team, I am committed to helping manufacturing business owners reach their personal and business goals. We assist with buy-side and sell-side due diligence, cash projections, structuring buy/sell agreements, minimizing tax consequences, and more.
Because Altus Exit Strategies, LLC is a wholly-owned subsidiary of ARB, my team is uniquely qualified to assist manufacturers planning to sell. As both CPAs and Certified Exit Planners (CExP), we bring the financial consulting and tax expertise of a public accounting firm to the exit planning process.
If you’re ready to discuss your strategy, contact me today. And check out our COVID-19 Financial Resource and Tax Center for related insights.
by Holly Ferguson, CPA
Holly Ferguson is a principal at ARB and the Practice Leader of the firm’s Accounting & Attest, Manufacturing, and Credit Union Services Teams. She provides industry-specific services for manufacturers, distributors, credit unions, businesses, and nonprofit organizations. Throughout her career, Holly has provided manufacturers with financial reporting consulting services, assisted with transactional accounting and consulting related to business acquisitions/sales, and analyzed implications and strategic implementation of new accounting standards. She is the former Treasurer on the Board of Directors and Finance Committee of the Manufacturers Association of Maine.