2021 was the busiest year ever at Steimle Birschbach in terms of the number of transactions closed. It was the second highest year in terms of total transaction dollar amounts. We attribute this to a few consistent themes.
First, there was significant concern about a potential change in tax rates. As you may recall, early in the Biden administration, there was talk of modifying capital gain tax rates to equal ordinary income tax rates for anyone with income in excess of $1.0 million. If enacted, this would have meant that if you sold a business for more than $1.0 million, all capital gain would be taxed as ordinary income. Thus, business owners that were in the early stage of contemplating a sale accelerated their efforts in an attempt to sell and close before any change to the capital gains rates would negatively impact them.
Next, there is an exceptional amount of private equity money chasing mid and small market deals. Historically, private equity funds were not interested in acquisitions smaller than, say, $50 million. However, given the amount of private equity now available, and more and more money chasing fewer deals, that number has dropped over the years – dramatically. For example, we closed a transaction for a seller who sold his company to a private equity firm for under $1.0 million. That was unheard of until a couple of years ago.
Another reason for the high volume of transactions in 2021 is that the EBITDA multiples were “hot.” An EBITDA multiple is often used to arrive at a general value of a business based on the amount of earnings before interest, taxes, depreciation and amortization. EBITDA multiples vary depending on the industry, the company’s financial records, and sometimes it feels like just the day of the week. An example would be a company with $2.0 million EBITDA in an industry with a multiple of 4x would be worth about $8.0 million.
Commercial debt rates being historically low, with tremendous competition among commercial banks, also made borrowing easy. We saw very few transactions last year stall or die due to a lack of financing.
Finally, and we have been saying this for years, is owner fatigue. Managing a company through the pandemic has been a significant challenge for every decision maker and has caused many owners to sell because of overall fatigue. This is a real phenomenon that has been taking place for at least the last 2 years – and probably longer.
Overall, we do anticipate 2022 to be another busy year for business transactions. We do not see any of the factors outlined above slowing down and current demographics continue to support this trend.
If you have questions or are considering buying or selling a business, please call Steimle Birschbach, LLC. We would be honored to represent you and your business.