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Market Timing 1st Quarter 2021
COVID 19 Effects

We as individuals, family members, employees, employers and our loved ones are all suffering through this pandemic. Many businesses are shut down and are forced to furlough employees. Other businesses and sectors are still up and running as best they can. The stock market seemingly recovered from hitting lows in February and March 2020. Similarly, the banking community seems to have eased some restrictions and are lending again. Demand for private companies is still strong. Buyers continue to look at and pursue private companies in many sectors.

Active Deal Due Diligence Request

Once the closing process begins after a Letter of Intent has been executed, the transaction enters the due diligence phase. At this time, typically Buyers will request 3 years of historical financial statements. While this is standard operating procedure, we are now seeing Buyers asking for revenue numbers for the years 2007 through 2010. This has never occurred before and the only logical reason for these requests is that Buyers are concerned about a further down turn.

National Debt and GDP

For the first time in history, the national debt exceeds the GDP. This didn’t even occur in 2008 to 2009 during the “Second Great Depression”. National debt is 109.73% of gross domestic product. Furthermore, the various levels of economic stimulus from the COVID 19 pandemic are adding trillions to our national debt. We literally owe more than we are making … how long can this last?

Capital Gains Taxes

We’re running a $24 trillion national debt and growing daily. The average debt per household is $65,120.00 while the median income per household is $59,055.00. The tax reform act of late 2017 will decrease revenue to the US Treasury in the short term. The gamble is the tax reduction will stimulate the economy and increase revenue for the US Treasury in the long term. However, the incoming Presidential administration has already signaled an intention to raise Capital Gains Taxes. Once Capital Gains Taxes increase, owners of private companies will receive lower proceeds when selling their companies.

Interest Rates

We have had 8 interest rate increases since January 2017. Most of us in the M&A world are always concerned about rising interest rates and their downward effect on the value of private companies. However, three times in 2019 the Fed actually decreased interest rates. This is the first time interest rates have decreased since 2008. The current pandemic had impacted the lending community initially harder but they seem to have recovered. The lower interest rates have cushioned some of the economic effects of the COVID 19 pandemic.

Longest Bull Market in History

Until the pandemic hit, we were in the longest bull market in history. Good news- we still are. The markets for private companies remains strong. Buyers and investors believe the US economy will re-open soon and the markets will remain strong. Unlike 1987 and  2008, the underlying cause for any hiccups in the market is not related to financial issues but health issues. Once the pandemic is under control, the overall market should recover quickly but again, for the moment, the market for private companies remains strong.