It’s just a few weeks into 2021, and it’s already clear that several factors are aligning to make this an historic year for deal activity. Last year, sellers who hit pause to wait out uncertain market conditions are back at the table and motivated to accept offers. While on the buyer side, there remains a pressure to put capital to use, as investors eye acquisitions in familiar industries where M&A activity has long been trending.

Below, I break down a few of the reasons why I’m painting a rosy outlook for the year. Then, I focus on the seller-side of the equation, outlining the crucial considerations sellers must make in the preparations leading up to a sale. The market conditions for sellers are looking advantageous, so even if you’re just contemplating a possible sale sometime in the near future, it’s a good idea to familiarize yourself with a few key questions that address how to sell a business. But first, let's take a look at the year ahead of us.

Why I Expect Historic Sales Activity in 2021

Pent-Up Demand

Like a lot of life in 2020, many planned sales were put on pause. Shutdowns hit certain industries more than others, and even as more segments of the economy began to open up, uncertainty still loomed.  While there were bargains in 2020, most deals involved healthy sellers receiving fair prices that ignored the pandemic, at least for the purposes of valuation. At the start of the year, deal activity returned as if it were a normal year, and I expect momentum only to build as the year goes on.

Tax-Law Changes

New presidential administrations bring with them new tax policy. And if history and proposals made on the campaign trail are any indication, the Biden Administration’s pending initiatives for the upcoming tax year will spur sellers to act. During the campaign, President Biden proposed to repeal capital gains taxes, which could effectively double tax paid on a potential sale, slashing a seller’s net (after tax) sale proceeds. So I expect a lot of activity toward the end of the year, as sellers will be anxious to close deals before the new tax law goes into effect. In 2012 following Barack Obama’s reelection, there was a similar fourth-quarter frenzy, when our team members collectively closed deals at a greater volume, for larger amounts, and within tighter timelines than I had before or have since.

Private-Equity Dry Powder

Many private-equity firms are still sitting on huge sums of investable cash, and they are under immense pressure to put this “dry powder” to work. After all, they can’t generate a return for their own investors unless they actually invest their money.  In the years leading up to the pandemic, private-equity firms both raised and invested greater sums than ever before in history, driving high valuations and greater consolidation as they competed with each other for both new platforms and add-on acquisitions. Expect the frenzy to pick up where it left off.

How You and Your Business Can Prepare for a Sale

Know the Timeline

First, understand that very few business sales are speedy transactions. There’s a lot at stake on both sides, especially if the seller is an owner-operator whose goals in a sale include both professional and personal legacies. That said, a typical sale takes about six months.

Perhaps the biggest factor impacting the timeline is the buyer. The timeline could be quick if both the seller and the buyer are small business owner-operators. In these cases, the buyer assumes the seller’s book of business, and the seller exits. But if the buyer is a larger company or private equity investor, expect a longer timeline. In these deals, many sellers are contracted to remain in a leadership role for at least three years as the business transitions.

Arrange Your Financials for Due Diligence

Does your business have a strong grasp of its financials? Every business owner needs an honest reckoning with this question or else risk struggling through the due diligence that precedes a sale. Frankly, many privately owned businesses don’t have robust financials at the level savvy buyers require. And while that’s understandable, as many business owners are consumed with day-to-day operations, it puts those sellers at a disadvantage. So if you’re considering a sale in the near future, now is the time to sort out gaps in your business’s financial reporting.

To help owners accurately assess the strength of their financial operation, here are a few questions to consider:

  1. Can your business produce monthly financial statements?

  2. If your business includes multiple offices, locations, or service lines, do your financial reports drill down to these individual levels?

  3. Have you performed a sell-side Quality of Earnings? If not, do you have the team to support a buyer's QoE process?

If your answer is “Maybe?” to any of the three questions above, then it could prove to be tough to defend a favorable valuation. 

Get Opinions from Investment Bankers Now

This is maybe our most timely piece of advice. The number one reason that deals fail is a seller's unreasonable expectations, and it should be no surprise that much of that relates to inflated valuation expectations. Investment Bankers with experience in your industry will be the most in tune with today's valuations and can provide priceless insight into your company's probably sale price.

Further, sales made in 2021 will be looking back at financials from 2020—a year that was, well, unprecedented. To what extent are temporary shutdowns factored into financials? What expenses from last year (new technology, health protocols, sanitation costs, etc) are temporary, permanent, or a one-time incursion? A sophisticated investment banker with knowledge of your industry will be able to analyze a few years of financial records to project a fair picture of the present state of the business and its future earnings potential.

Think about Your Future

In short, is a sale all about the price your business can command? Or is there more at stake? This is a huge question sellers have to grapple with, and some considerations to help you along include:

Who’s the next owner?

Again, maybe this doesn’t matter to some sellers to whom the price is the only figure worth calculating. But for many business owners, legacy is important. Many have spent a lifetime working to build a business, and its future is something many still care about, even if they’re no longer at helm.

Are you replaceable?

How critical is your role to the future performance of your business? If a seller is responsible for revenue generation, M&A or strategic growth, or critical leadership for high-performing teams, the buyer faces considerable risk in a transition. When the seller leaves, will customers or employees leave with them? Sellers who play this critical role can expect to remain an employee or partner of the new owner for at least three years. An owner interested in a quick exit should focus on replacing themselves first. 

Is your exit plan in 2–3 years? Or 5–10 years?

The timing here can make a big difference. If you’re in the former camp and thinking to sell your business sooner rather than later, it’s in your best interest to sell now in 2021. With looming new tax increases, it’s a significant difference in what you would take home now compared to two years from now. On the other hand, if you’re prepared to stay at your business for at least another five years, there’s no need to rush to sell this year. With this longer timeframe, you’ll likely earn more from the combination of your annual income and the future sale price that is, hopefully, higher as you continue to grow your business.

Do you want a second bite of the apple?

Well of course! But what do apples have to do with my business? Let me tell you: if you sell to a private-equity firm, you’ll typically retain some equity in your business. So a few years down the road, you’ll have the chance to sell your business again—or in other words, take a second bite of the apple. While the expression is metaphorical, this arrangement is very literal and an increasingly ever-present reality in industries with PE-players. So while this factor doesn’t weigh too heavily in a decision to sell in 2021, it’s a major consideration when deciding who the buyer is and when you want to retire.


More about the Author

Craig Castelli is the Founder and CEO of Caber Hill Advisors and is considered an authority on healthcare M&A, capital markets, and valuation. He has advised hundreds of privately held businesses, private equity firms, and public companies on their corporate development activities. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

More about Caber Hill Advisors

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Across the team is a well of expertise in serving small and middle market companies in several specialty industries. If you’re interested in learning more, contact any one of our leading advisors to have a conversation about what’s important to you, your business, and your future.

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