Articles that compare the number of deals announced in any one quarter to a prior quarter in an attempt to prove a waxing or waning of M&A activity should carry little weight, because many factors can lead to the timing of a deal announcement: “Should we announce at deal signing or deal closing? Should we wait to batch the announcement with another transaction happening a few weeks later? Should we announce the deal at all?”
You don’t wake up one day, decide to sell your company, and have it sold by dinner time. M&A processes can take anywhere from six to 10 months – sometimes even longer with extenuating circumstances. This means that an announcement of the number of deals transacted is, in fact, old news. Give us information on how many processes are being kicked off and now we have something to talk about!
Nervous chatter has rippled throughout the industry for the past few years about high interest rates and the ability for buyers to continue closing deals. Articles circulated about a slowdown in deal activity, industry conferences hosted panel after panel addressing the ability and willingness of buyers to borrow money to consummate transactions. But, as I mentioned above, M&A is a lagging economic indicator. Interest rates were high at the start of the year and yet the flurry of deal announcements remains steady today.
A good deal will not slip through the cracks for temporary economic reasons.
What this proves is that buyers have an ability to pivot in order to get a good deal done – high interest rates may mean issuing more equity in a deal than historically, but a good deal will not slip through the cracks for temporary economic reasons. From our vantage point at Turkey Hill – based on our active deal count, expected announcements over the coming months and conversations with prospective sellers – M&A activity is not waning any time soon.
The Fourth Quarter Crunch Has Arrived
As prudent financial advisors, sellers heading into the fourth quarter often force a question onto themselves: “Should I try to close my deal by Dec. 31, or should I extend closing into January?” This decision is a tax game – some sellers would prefer to rip the Band-Aid off and pay taxes as soon as possible, while others prefer to punt into the following tax year while they settle into life as a freshly sold entity.
This is an election year with greatly anticipated outcomes that could have a meaningful effect on taxes, so the stakes feel even higher. Regardless of where you fall on the political spectrum, sellers are acutely aware that who takes power could dramatically impact capital gains rates.
So, the fourth quarter question facing many sellers now has splintered into a series of questions: “First, who do I think is going to win the election? Second, do I believe they will enact a change to capital gains rates within their first year in office?” But the most important question every seller should be asking themselves is, “Do I care?”
Let me tell you why.
Don’t Overlook Risk For An Artificial Deadline
The days of auction processes are (or should be) behind us. We’ve been screaming at each other about cultural alignment for years. Think about how often people cringe at the idea of rushing into a marriage: “Why not just date for a few more months?” The same logic applies here. Finding a partner means iterating – getting to know each other to a point where you can anticipate their reactions in times of stress and disagreement. This is a hard thing to truncate to reach a deadline that may be artificial and self-imposed.
Advisors are risk-averse by nature, but sometimes the threat of a risk such as capital gains treatment can cloud judgment to the point that the real risk – whether this is the right long-term partnership for you, your clients and your employees – can end up overlooked.
Closing your deal by year end should be a goal, not a deadline.
Any seller close to signing a letter of intent right now should to take a breath, assess the situation and contemplate the odds and what they may actually mean, both quantitatively and qualitatively. Closing your deal by year end should be a goal, not a deadline. After all, the deal will be announced eventually.
Jessica Polito is Founder and Principal of Turkey Hill Management, an advice provider for RIA sellers in the M&A process.
