Buying or Selling a Business Early in 2016

Dec 15, 2015

Transactional activity is traditionally strong during Q1 in the mergers & acquisitions marketplace associated with the purchase & sale of privately held companies. Factors driving business brokerage activity early in the year include buyers and lenders preferring to evaluate & fund business deals with complete year financial information that can be compared with prior years without a reliance on projections, New Year business plans that include directives for growth by acquisition, and generally a larger pool of businesses for sale than in Q4.

As the premier business brokerage firm in the Pacific Northwest, IBA professionals look forward to the level of activity that occurs in our offices in the New Year in terms of bringing new businesses on the market and negotiating the sale of the businesses we have been tasked to represent employing superior knowledge, experience, and professional representation and deal facilitation skills.

However, the New Year can also be a period of uncertainty in multiple environments that impact business sellers or buyers. The first environment that is likely to have some uncertainty is the tax environment impacting entrepreneurs.

Unfortunately, the United States Congress has gotten into the habit of not providing clarity on tax policy for a New Year prior to the New Year commencing by deferring passing tax legislation until after the relevant time period has started. This “lack of decisive action” prevents entrepreneurs from strategically planning from a tax perspective with certainty on a calendar year basis. A specific example of a tax law that impacts entrepreneurs that has seen change in recent years is the Section 179 depreciation deduction which dropped to a $25,000 maximum allowance and $200,000 phase-out threshold in 2015 from a $500,000 maximum allowance and $2,000,000 phase-out threshold in 2014. This is an important tax deduction to entrepreneurs as it encourages investment in equipment and generates short term tax benefits for business buyers. It is currently unknown what the maximum allowance and phase-out threshold will be for Section 179 depreciation in 2016. Section 179 depreciation is just one of the tax laws that has not been cast in stone for 2016. Entrepreneurs should be cognizant of other federal, state, and city taxes that are presently in flux with regard to 2016 and plan appropriately for all potential outcomes.

A second environment that has the potential to impact business sale transactions that often evolves from one calendar year to the next is the bank lending environment. Banks often implement lending & underwriting policy changes at the start of new calendar years. Unfortunately, these changes are not always articulated effectively from corporate to banking professionals working in the community with entrepreneurs. A prudent business buyer with a loan that was initiated in one calendar year that will close in the next calendar year should inquire to their lender at the start of the new year to see if any policy changes implemented will impact their specific loan and if possible, obtain in writing confirmation that the loan will not be impacted by any policy changes made by the bank from the old year to the new year.

Unfortunately, I have personally experienced a situation where evolving bank policy resulted in a business buyer being approved and provided a letter of commitment by a highly regarded national bank for an acquisition loan and employ that approval to successfully win a competitive negotiation to purchase a company only to have the bank reject the loan in underwriting days before closing based on a “new” policy that was never articulated to the business buyer by the local bank vice-president he had selected to work with from a group of skilled, knowledgeable banking professionals representing other banks interested in financing the acquisition. The bank, in this situation, elected not to honor their prior policy in place when the letter of commitment was issued. The buyer, an individual with significant relevant experience, lost the deal because of the evolution in bank policy. The seller had to defer their retirement motivated succession plans. The situation still bothers me today because it was a “lose-lose” situation where innocent parties were detrimentally impacted due to no fault of their own. It is my hope that others will learn from this experience and plan appropriately to mitigate potential risks during the underwriting process.

I anticipate a strong 2016 in terms of business brokerage activity in the Pacific Northwest and encourage any parties participating in the market place to plan accordingly given the knowns & unknowns present in the entrepreneurial environment.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.