Unload firms before economy or politics take a turn
Families who own businesses are getting this
piece of New Year’s advice: Sell.
Not only is it a great time to put a private
company up for sale while the economy is strong and many deep-pocketed buyers
are circling, wealth advisers are also reminding clients of looming political
uncertainty toward the end of 2020.
If President Donald Trump loses the election,
Democrats running to replace him have promised to boost taxes on the rich.
While the wealth tax proposed by senators Elizabeth Warren and Bernie Sanders
gets the most attention, other top candidates have ideas for squeezing the
0.1%. Former Vice President Joe Biden, for example, said he wants to almost
double the rate on long-term capital gains to 39.6% for taxpayers earning more
than $1 million a year.
“The Democratic zeitgeist now seems to be higher
taxes,” said Brad Dillon, senior wealth strategist at UBS Group AG in New York.
“If you were thinking about selling your business in the next two years, it’s
definitely something to think about.”
For the owner of a multimillion-dollar
company, selling by the end of 2020 could result in a much smaller tax bill
than striking a deal in 2021 under new rules. Of course, a new president would
need Congress to go along with a tax hike, and that’s hardly a certainty even
if Mr. Trump is defeated.
Nonetheless, the political risks also
coincide with excellent conditions for selling.
“This is as good as it gets,” said Marshall
Rowe, president for business-owner services at Colony Group, where he advises
owners of companies worth about $50 million to $350 million.
U.S. stocks have continued to
rise, with the S&P 500 advancing 1.8% this month after
surging 29% last year.
With the stock market setting record
highs almost daily, interest rates near historic lows and the broader
economy doing well, owners are getting high valuations for their businesses.
The family of the founder of Les Schwab Tire Centers is weighing a sale that
could value the Bend, Oregon-based retail chain, with more than 450 locations
in 10 states, at more than $3 billion.
There are plenty of potential buyers seeking
acquisitions.
Private equity firms have an unprecedented
amount of cash to deploy. Blackstone Group Inc., Carlyle Group LP and other
firms have almost $1.5 trillion in unspent capital, the highest year-end total
on record, according to Prequin data. Private equity firms executed about $450
billion of deals last year.
Many super-rich families are also in the hunt,
adding to the competition. They’re building out family offices — mini
investment firms set up to manage their personal wealth — and looking
for recession-proof businesses to include in their portfolios. In July, for
example, the family office tied to billionaire Chicagoan Tony Pritzker acquired
wastewater treatment company Valicor Environmental Services.
When 111 U.S. family offices were surveyed by
Fidelity Family Office Services last year, 98% said they expected to maintain
or increase direct investments over the next three to five years.
Buyers are also coming to the U.S. from
abroad. A Qatari-backed firm snapped up the Montage Beverly Hills hotel last
month, while Africa’s richest person, Aliko Dangote, plans to diversify his
wealth by opening an investment office in New York.
The decision to sell a family business isn’t
made lightly. The process of finding a buyer, agreeing on a price and
completing the transaction can take a year or more.
Some families also aren’t sure they want to
let go of their life’s work. That’s driving investors to make more creative
pitches.
“We’ve seen a number of families that are
reluctant to give up control immediately but may be willing to sell a minority
position first, then after getting comfortable, sell a controlling stake over
time,” said Brian Frank, who runs Declaration Partners LP, which manages
Carlyle co-founder David Rubenstein’s family fortune.
“Clients are more open right now because
the market conditions are so good,” said Lisa Featherngill, head of
legacy and wealth planning at Abbot Downing, a unit of San Francisco-based
Wells Fargo & Co. But “they’re not going to take the deal until it’s the
right deal.”
In this environment, some business owners are
getting offers they can’t refuse.
“There is an acceleration of a desire to
sell,” said Joan Crain, global family wealth strategist at Bank of New York
Mellon Corp., citing “clients who were lackadaisical” but “are now very
motivated.”
If conditions change, advisers want to make
sure they’re not blamed for failing to warn clients to sell when times were
good. That’s particularly true for the many Baby Boomer business owners who are
now approaching retirement age.
Older owners have plenty of good reasons to
unload their businesses now, their advisers say. Many are already worried about
the future of their industries, especially the threat of disruption from new
competitors or technology changes — “getting Amazon-ed,” as Mr. Rowe puts it.
Aging business owners often realize that a buyer with deep pockets is more
likely to have the expertise and resources to keep up.
Many boomers hoped their children would take
over at some point, but Mr. Rowe and others said that’s happening much less
than it used to. Advisers often need to offer a reality check to owners whose
children aren’t stepping up to take over. “We can see objectively
that’s not going to happen — time is running out,” Ms. Crain said. “Sometimes
we have to nudge them.”
The 2020 election is one risk among many
facing closely held businesses, but it gives advisers more ammunition to
persuade clients that they shouldn’t miss the chance for a lucrative exit.
If Democrats win the White House and both
chambers of Congress, the wealthy could face a number of expensive tax changes.
In addition to targeting wealth and capital-gains income, Democrats, including
Mr. Sanders and Mr. Biden, have proposed changes to estate tax rules that would
make it harder for the wealthy to pass on fortunes to children, grandchildren
and beyond.
Democrats could also reverse provisions of the
tax overhaul enacted in late 2017. The law boosted many companies’ profits and
valuations by slashing the corporate tax rate and creating a controversial 20%
break for owners of many other businesses.
Then there are regulatory matters that affect
particular industries. Many business owners are fans of Mr. Trump’s hands-off
approach to issues including environmental and labor rules. A Democrat in the
White House would almost certainly seek to reinstate and strengthen regulations
that Mr. Trump rolled back and wouldn’t need Congressional approval to do so.
“If there’s an administration change, the
risks are bigger than taxes,” Mr. Rowe said. For his clients, “it’s a
combination of those things that is getting them a little spooked.”
While it may feel far away and
unlikely now, a big Democratic victory in November could trigger a stampede of
deals as rich clients grab one last chance to exploit the current rules. Estate
planners, financial advisers and lawyers said they would expect an extremely
busy several weeks if Mr. Trump loses.
“If a Democrat is elected,” Mr. Dillon of UBS
said, “it’s going to be a madhouse.”
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