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Monday, 05 November 2012 01:12

ELECTING TO SELL: Uncertainties about election, capital gains create a flurry of M&A activity

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Attorney Jon Siebers Attorney Jon Siebers PHOTO: Joe Boomgaard

GRAND RAPIDS -- As Americans step to the polls on Tuesday, a number of West Michigan business owners have already elected to do something they probably couldn’t have done easily four years ago: sell their companies.

Local attorneys report that there’s been a flurry of merger activity as owners of small and middle-market businesses throughout the region sprint to get deals done over the next few months. Uncertainty surrounding the election and the overall direction of the economy, coupled with the possible expiration of the so-called Bush Tax cuts, has driven a growing number of local owners to put their companies on the market.  

There are local firms on the buy-side, too, but the majority of transactions involve companies on the sell-side, according to several local lawyers that MiBiz spoke with over the past two weeks.

“I’m seeing people across a wide range of industries [who are] figuring it’s a good time,” said Jonathan Siebers, an attorney in the Grand Rapids office of Smith Haughey Rice & Roegge. “Values have come back some, though not to pre-recession levels.”

The local M&A movement is bucking the national trend.  Nationally, merger activity is limping toward its slowest year since 2009. Executive concerns about the U.S. fiscal cliff and the European debt crisis have slowed the pace of transactions, despite ideal conditions in the form of a hot stock market, cash-rich balance sheets and the availability of cheap corporate debt. In the U.S., deal volume is down nearly 20 percent to $662 billion through the first nine months of 2012, according to Bloomberg.

While Siebers hears the data about M&A activity being down, he doesn’t see it in his practice. In fact, the attorney says he opened four new files on merger transactions in just one week last month.

Most of his deals tend to be at the low end of the middle market, with transaction values from about $1 million up to $15 million. The four transactions that came over the transom a few weeks ago included two manufacturing companies, a retail computer company and a health-care firm. Location-wise, two were in Grand Rapids and two were on the lakeshore, including one in Traverse City.

He doesn’t believe the capital gains concerns have been the only factor driving deal volume among his clients.

“They’re aware of it – or I make them aware of it – but it’s not at the top of their minds or the forefront of their concerns,” Siebers said. He also attributes some of the rise in local deal volume to distressed companies seeking relief as well as fatigued Baby Boomer owners who don’t want to go through another economic cycle.

Siebers does acknowledge that the election uncertainty probably does come into play in some sellers’ minds. As they weigh whether the economy will move forward or back after the election, he said, “Some are saying, ‘We can live with the value the company is showing right now, so let’s close and be done with it.’”

For some owners who’ve put their companies up for sale, it’s merely a matter of taking risk out of the equation, says another local lawyer.

“Politics are unpredictable, and business owners don’t like that,” said Fred Goldberg, an attorney with the Grand Rapids office of Mika Meyers Beckett & Jones, PLC. Goldberg says his firm has seen a modest uptick in M&A activity in recent months, particularly among small companies that are set up as “pass-through entities” – limited liability companies and S-corporations. He says transaction activity is up “because the tax rate is going up fairly substantially in the next few months.”

Goldberg said his firm works mostly on transactions in the $2 million to $40 million (deal value) range, in a variety of industries including healthcare, retail and manufacturing. The expiration of the Bush tax cuts could impact small business owners in a couple of different ways, he said.

First, President Obama has said he plans to boost the capital gains tax rate from 15 percent back to 20 percent for couples making more than $250,000 if he’s re-elected. Obama also plans to implement a 3.8 percent investment tax to help pay for the Affordable Care Act health plan. That would create a substantially higher tax rate for owners who sell their companies or take compensation in the form of dividends or distributions.

Additionally, estate taxes are set to go up in 2013 if the Bush tax cuts expire. That will lower the exemption from $5.12 million down to $1 million, and the tax rate would jump from 35 percent to 55 percent.

“That’s not insignificant,” Goldberg deadpans.  

For some owners, the window of opportunity may be closing for a while, he says. 

“A lot of these business owners are Baby Boomer types who are looking at the future and retirement,” Goldberg said. “A lot of them are asking themselves, do I sell this year or wait five more years? Either decision might make sense, but you’ve got a higher hurdle with the presumed changes in tax rate.”

Read 3484 times Last modified on Monday, 05 November 2012 11:31
Brian Edwards

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