Timing is an important part of every sellers decision. Assessing whether you can find the right valuation today or are better off using the next year or two to build the business requires thorough deliberation. US sellers must now consider the impact of an increase in the Long Term Capital Gains Tax rate. Most of us expect a graduated increase from the current 15% to as much as 28% by 2013. So, what impact does this have on valuation and go-to-market timing?
We modeled how much a business must grow in each of the next three years to produce the same outcome as a sale in 2010. We assumed a company with $10M in sales, 20% EBITDA and a 9X EBITDA multiple with all of the sale proceeds subject to cap gains tax. We wanted to offset the increase in cap gains and also negate the erosive effect of inflation and lost interest on net proceeds given a delayed sale. We did not consider a healthcare tax or an increase in ordinary tax, but probably should have.
The impact is stunning as the table below illustrates. Sales in 2011 would need to grow 14% simply to produce the same after tax result as a transaction in 2010. A sale in 2012 needs another 11% growth, and a sale in 2013 needs 10%. Thats nearly $1.4M of new sales each year. By 2013, thats 41% sales growth over 2010. These growth rates dont change with the size of the business either.
|
|
2010 |
2011 |
2012 |
2013 |
|
Revenue Target ($MM) |
10.00 |
11.42 |
12.74 |
14.08 |
|
Enterprise Value ($MM) |
18.00 |
19.13 |
20.13 |
21.25 |
|
YoY Revenue Growth |
--- |
14.2% |
11.5% |
10.5% |
|
EBITDA |
20% |
20% |
20% |
20% |
|
EBITDA Multiple |
9.00 x |
9.00 x |
9.00 x |
9.00 x |
How achievable is this growth? Most companies are emerging from 18 months of recession, tight cost management and flat revenues. These companies need to invest in sales, marketing and maybe product development to generate growth. That means margins wont improve much as revenue grows. If your market is stagnant or worse, shrinking, that means sales growth must come from market share growth. Perhaps you need to enter a new market to grow? Both are expensive.
Furthermore, its difficult to grow faster than about 25% YoY on cash flows alone. So assess whether you can finance your growth with cash flows, or whether you need more debt or a new investor? You may be far better off by leveraging the resources of a large, trade buyer and putting cash in your bank in 2010.
Bottom line now is a better time to be in the market than you thought.