By: Dexter Braff
Why Valuations May Rise in 2021 – And Why You May Not Care
If you’re in the predictions game and you’re paying attention, you can see that just off in the distance several factors are lining up perfectly to collide in 2021 to propel valuations.
First, there is the pandemic, and with a little luck, the beginning of the end. With several promising vaccines currently in stage three trials, and others surely to follow, there’s good reason to be optimistic that the mask acne may finally clear up, making both you, and the go-forward prospects for the economy, more attractive. And with planes flying, and conferees conferencing, and people meeting, and lenders lending, the rusted over gears that propel M&A forward will get a nice coat of grease and begin grinding anew.
Next up, is acquisition demand. Or, more precisely, the mounting pressure to buy. With private equity losing as much as a year to deploy capital from their funds – and a year to perform their PE magic to generate returns – the pressure will be on to acquire as much as they can, as soon as they can. And with lenders needing to do much the same thing, they will be eager to do their part to bolster sponsors’ spending.
Then there’s the matter of the election. If Joe Biden wins, his tax proposals would eliminate the preferential treatment for capital gains for the highest earners, raising rates from 23.8% to 39.6%. Now you might say, “So what, that’s the seller’s problem, not the buyer’s”. And you’d be right about the former, but wrong about the latter. Because the seller’s problem becomes the buyer’s.
Why?
Because on cap gains treatment alone, sellers’ net proceeds would fall nearly 21% vs. what they otherwise would have received if they sold in 2020. Accordingly, the sudden shock and awe-full realization will send many angrily to the sidelines – unless buyers reluctantly step in to step up their valuations to soften the blow. And don’t think that once the clock strikes midnight on December 31, that buyers and sellers will try and beat Biden to the tax punch. Because it is not at all unlikely that a bill passed in the spring will be made retroactive to January 1.
Now, put it all together.
Greased M&A gears. Impatience to get back to buying. And a tax increase that falls, in part, to buyers, to address.
More than enough to boost valuations a turn or two times EBITDA.
And yet, there’ll be no joy in Mudville for sellers. Because at best, their net will likely be the same. And at worst, a chunk lower.
At least everyone will be unhappy.