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« Consolidation? A contrarian view. | Main | The Slaughterhouse – A Modern Fable »

Should I stay or should I go now?

Yes boys and girls it is gut-check time... it is time for a very hard look in the mirror.  As those modern musical philosophers The Clash ask, “Should I stay or should I go now?”  Thanks to the infinite wisdom of our elected federal schmucks, the effective capital gains/transaction tax is going up… the only question is how high.  At the end of this year the capital gains tax will certainly go up 5%, that’s a 33% increase to 20%.  The highest personal income tax rate is going up 4.6%... the medicare tax which will now include investment incomes, increases 3.8% with a second one at 0.9% - that’s a 4.7% medicare hit.  All in all you are looking at a 100% increase in the sum total of various taxes if you would happen to sell your business in the next few years… your dear Uncle Sam is going to take 30% off the top of any deal… note that not all these take effect next year, some are a couple years down the road.


Regardless, if you are even considering the sale of your business in the near-term, this might be the year to get it done.  On the flip-side, if you want to make an acquisition now is the time to step to the plate.  This effective capital gains rate and new transaction taxes are going to lock assets in place for at least a few years – assuming sanity returns at some point in the future – it might be for more than a few years.  This is true for beer distributors and for that matter, any other assets you might own or desire. 


You’re likely to see deal flow evaporate significantly in the coming years – other than perhaps those poor souls who for whatever reason are forced to sell.  If you don’t sell now, you’re making a commitment to remain in this business… whether you acknowledge this or not.  If you don’t buy now, you’re making a commitment to not make an acquisition in the immediate future.  So whether buyer or seller, it is gut check time.  Use Steve Cook’s and my services or don’t, but if you fall into either of these camps get moving and get something done now.


If you are a potential seller there are a couple of factors to consider.  First is debt.  Bottom-line, if you’ve got a lot of debt the odds are a sale now won’t make sense… you need the asset to pay down the debt, otherwise your next return after paying off debt and taxes simply doesn’t work… therefore you’re probably in the game whether you like it or not.  If that’s the case make certain you run a high performance company which maximizes the cash to the bottom line… and use this to pay down your debt, not buying toys or expanding your lifestyle ;-)  This has the added benefit of maximizing EBITDA which will only increase the value of your business should more reasonable times come along some time in the future… this is true for all of you. 


For all you wholesalers who for too long have run fat organizations, read that last line again.  People like to pay for proven performance… not what the company could put to the bottom-line but what it actually has demonstrated can be accomplished.  Even if everyone and his dog knows there is a lot more that could be driven to the bottom-line, it is not an easy task to get someone to pay for these unrealized cash-flows.


Second is your personal financial situation.  Things are different if your distributorship is the primary financial asset you own or if it is simply one of many significant financial assets.  If the distributorship is your only significant asset… your primary source of wealth… this might be a good time to take your chips off the table and put that wealth in your pocket.  Locking in the value now, i.e. selling, is probably the safest financial move… although I know a lot of you don’t want to hear that… and I know that these businesses are FAR from “just” a financial asset. 


But otherwise you are effectively betting that when (if?) transaction costs come back down, the value of your business will not have decreased substantially.  If the value of your business declines significantly before the effective capital gains/transaction rate comes down, you will probably face a significant financial loss.  I think values will remain quite strong at least for the near-term but with the present crew in DC it is difficult to predict what waits around the next corner. 


On the other hand your distributorship might be one of many significant financial assets you own.  This can change the analysis.  I have one wholesaler who is contemplating a 15 times EBITDA offer… on a purely financial basis this is a no-brainer; take the money and run.  But this wholesaler has a lot of diversified wealth and even if the distributorship’s value went to zero, it would not affect his lifestyle.  Might hurt on paper but only there.  For this guy, the decision is driven by non-financial realities… I’d still take the money and run but my checkbook doesn’t look like his ;-) 


If you’re a potential buyer, step to the plate.  Now is not the time to try to “steal one”.  Those guys never get a deal done.  I think it would be a mistake to believe these changes will force potential sellers to race into your willing arms.  If you want to make an acquisition(s) which helps your strategic goals, now is not the time to be passive and hope for some low-ball deal to come your way. 


Once these effective transaction costs go up it will be much more difficult to get a deal done.  The seller won’t want to eat them… and neither will the buyer… but someone will have to… and we’re talking perhaps over 30% of the deal!.  So this leads to perhaps a willing seller and a willing buyer but a huge gap of transaction costs between them… a gap that may be very difficult to bridge until (if?) these costs come back down.  And realistically, that probably won’t happen until at least 2013.  One could make a case that it will be much longer than that.


So whether you are a seller who is looking to lock in their wealth or a buyer who is looking to set the strategic chess board to their advantage, NOW is the time to get a deal done.  These coming increases in transaction costs are going to become an ever growing gap between buyer and seller which will only become more difficult to bridge… and ultimately these government costs take money out of someone’s pocket to no gain for either party.  It sucks but that’s the way it is…




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