Should Business Owners Sell by 2024?

Economically speaking, COVID-19 was a “natural disaster.” That’s according to Brian Beaulieu, CEO and chief economist of ITR economics. Beaulieu focuses on helping business owners and their advisors understand the market ahead.

Beulieu presents that since the cause the current recession was caused by COVID-19, and not economic factors, the economy should bounce out of it quickly. However, he is predicting the next recession will be around 2025 or 2026, if nothing major occurs. 

Currently, the outlook is good for businesses looking to grow through acquisition. Interest rates are at an all-time low, thus making this a great time to buy companies by leveraging other people’s money. Interest rates likely won’t rise until late 2023, maybe not even until 2025.

Thinking about selling, Beaulieu advises business owners to exit by 2024. The economy is strong and should stay that way for the next few years. Plus, when interest rates are low, buyers can afford to pay more.

However, business owners should be focusing about the NET one retains after selling a business, not the total purchase price. The Biden administration proposes to almost double the current capital gains tax rate.

When, and if, those tax increases will go into effect is unclear. Beaulieu says it could happen anytime from 2022 to 2024, other economists are even saying retroactively in 2021! If taxes do increase, expect them to stay for the long term because by 2030,  pressures from the national debt, social security, and Baby Boomer retirements mean the government will not be able to afford any reductions in tax revenues.

Beaulieu suggests that conditions are such that the U.S. could be up against another Depression-era recession 10 years from now. He advises owners to “think long and hard” before holding on longer than 2029.

With a downturn looming in 2026, and capital gains slated to increase, business owners who were thinking about selling in the next five years may want to accelerate that plan.

Roughly speaking with all else being equal, a business owner who sells a company for $10 million today, nets approximately $8 million after capital gains. If on the other hand a business owner focuses on growing one’s company to $12 million by 2023 and the proposed new taxes are in effect, the net will be ~$500k less…~$7.5 million.

If plans are not ‘sell soon’, business owners may want to borrow money to invest in one’s current company or an acquisition. Money is cheap, so if not getting out, grow!  Just make sure the debt by is paid off by 2029. Trouble is in the forecast but for now, Beaulieu says, “This economy of ours is poised to go.”

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