President Bush, along with leading financial experts, is warning Americans daily that we are in the midst of our nation's most severe and dangerous economic crisis since the Great Depression. As uncertainty grows and fear rises, many business owners are facing tough decisions concerning the timing of an industry exit.
Owners considering selling early in the midst of this economic/fuel crisis, face undeniable risks. But for many business owners, the risks of selling early pale in comparison to the risks of selling late.
Factor 1: Current & Future Selling Climate
Over the past 30 years, chauffeured transportation has demonstrated the ability to endure tough economic times such as the 73 Fuel Embargo, insurance crisis, workers comp crisis, two gulf wars, terrorists attacks, etc. and still maintain intrinsic value over time. However, uncertainty surrounding the current fuel and economic crisis do not help the appetite for investment in our industry. In the last thirty days, private equity groups have indicated to Charles Tenney & Associates a reduced interest in transportation companies.
Should fuel costs continue to red flag investors and/or should the economy continue to struggle, the appetite for purchasing transportation companies will likely continue to decline over the next 12-24 months.
The good news is that many buyers are still actively pursuing the chauffeured transportation industry and are willing to pay fair market value for good businesses as well as financially challenged businesses--right now. Currently CTA has three (3) specific buyer groups. 1) Investors who feel that they can buy now at a fair market price and receive a return on investment upon selling at a later date. 2) Financials buyers who are being forced out of Corporate America. These buyers have a golden parachute and are not ready to retire. 3) Strategic buyers who are paying fair prices for businesses that present an advantage to the buying company’s bottom line. Example: CTA sold Lincoln Limousine in Orange County CA to Sterling Rose Limousine in Temecula, CA in August. Seller, Gerardo Ortiz was pleased with the sale. Buyer, Steve Levin, is already enjoying the cash flow synergies created by the acquisition.
The selling climate is not necessarily ideal right now, but over the next 12-24 months it is projected to be much less favorable with more risks to sellers.
Factor 2: Impact of Capital Gains Tax and other Potential Tax Changes:
Currently the capital gains tax is 15%. Many anticipate capital gains tax to increase to 20% to 30%, and expect the change to be realized soon. A modification of any amount will negatively affect a seller’s net proceeds from a business sale. Also, as sellers plan the timing of their industry exit, they must take into consideration how new U.S. leadership could modify corporate taxes for small businesses and how those increased taxes could potentially impact the future value of their business. A potential seller has to be able to account for how he or she will make up for the additional tax government is expected to take from a future business sale. If there is no plan to off-set the loss from increased capital gains tax, potential sellers are welcoming disappointment and enormous risks by delaying a sale.
Possible sale scenarios concerning capital gains tax: a) Seller goes to market and accepts less than optimal but fair offer for business and pays lowest possible capital gains tax. b) Seller postpones sale, improves business, but still nets less on sale due to increased capital gains tax. c) Seller postpones sale, business struggles due to continued economic decline, takes on more debt, becomes less attractive to market, accepts lower offer in distress and nets even less proceeds due to increased capital gains tax. d) Seller postpones sale, invests significant time and money in business to combat economic crisis, delays retirement 3-5 years, improves business sale, but additional proceeds and increased capital gains tax turn out to be a wash.
The market conditions aren’t spectacular right now for selling, but capital gains tax is the best it is likely to be in the foreseeable future. The market is expected to continue to decline and the capital gains tax is expected to become less favorable to sellers in the near future.
Factor 3: The Challenges of Securing an Equal or Better Sale in the Future:
According to the Association of Corporate Business Travel (Sept 24, 2008), 33% of corporations indicate they will spend less on travel in 2009—due to fuel challenges and uncertainty in the economy. To confront the decline in travel, many transportation business owners will likely be required to work much harder and smarter to maintain their business’ current value over the next 12-24 months. Additionally, the tools for maintaining and expanding transportation businesses (lines of credit, outside investment) may not be as readily available as they have been over the past 10 years. Example: A CTA client’s 250,000 line of credit was called last week by JP Morgan Chase as a result of the financial crisis in the last two weeks. JP Morgan Chase communicated to CTA’s client that many other creditors are taking similar action across the country. Further, because of likely increases in interest rates, the cost of re-investment will present a greater risk- less return scenario for many business owners.
Our industry is aging, with a great percentage of business owners being in their 50’s to 60’s—and many in their 70’s. CTA speaks to owners daily on the edge of retirement. Owners facing the twilight of their transportation careers need to seriously evaluate their costs and potential benefits of holding on to their business. In many cases, the risks far exceed any potential reward.
In this historic economic crisis, business owners in our industry face tough decisions that will potentially impact generations to come. According to our national leaders, the season ahead could potentially be the most dangerous and unforgiving since the Great Depression. If you are trying to time your exit from this industry, and you suspect you may not have the passion to persevere through this economic storm, please listen to the severity in our national leaders’ voices. Accepting the risks of selling early is not ideal. But the risks of selling early pale in comparison to selling late.
If Charles Tenney & Associates can be of any assistance, we are here for you. Please use the contact form below to reach a CTA Professional Intermediary to discuss your exit options.
