Plastic mergers, strong acquisitions in the first half of 2021, are set to continue for the remainder of the year
A big issue affecting the plastics M&A market in 2021 is the possibility that the U.S. government will increase the capital gains tax rate from 20 percent to 39.6 percent. This proposal isn’t yet in place – and could be scaled back if passed – but it has caught the attention of plastic owners, whether they are financial firms or long-time retired owners.
“We’re seeing a number of business owners looking to sell sooner or later; they aren’t waiting for the tax hike,” said Bill Ridenour, owner of Polymer Transaction Advisors Inc. in Foxfire, NC
“The big driver today are family businesses that overtake capital gains taxes,” added Weil in Mesirow. “They survived COVID and they are doing well, but some owners are tired. Usually, if you’ve been thinking about selling for some time, capital gains can be a catalyst in the decision to sell. “
Capital gains “are a factor,” said Matt Miller, managing director of BlueWater Partners LLC in Grand Rapids, Michigan [private equity] Groups looking for a way out. And private owners who have thought about timing and their plans may want to sell now. “
To make matters worse, the increase could come back retrospectively by April this year, meaning owners may have to pay the higher price even if they sell before the end of 2021. Several professionals said this scenario is not likely, but it cannot be ruled out.
“It’s a reality check for owners, but when it’s retroactive there may not be a race to close deals by the end of the year,” Blaige said.
“There is a lot of uncertainty about changes in capital gains taxes,” added Phil Karig, managing director of Mathelin Bay Associates in St. Louis. “There’s at least a chance the increase won’t apply to sales in 2021.”
Sellers looking to sell before the increase could also be pushed by buyers to accept a lower price just to close a deal.
“Every buyer wants to take advantage of capital gains or close a deal quickly,” said Peter Schmitt, managing director of Montesino Associates LLC in Wilmington, Delaware. “There is leverage on both sides.
“If you ask an owner today, they want to know what will happen in the next five years, how long the multiples will stay high and how much they can keep when they sell their company,” said Schmitt.
Regardless of the impact, the discussions about capital gains are not going to go away anytime soon.
“We expect further increases in the second half of the year due to capital gains,” said PMCF’s Hart. “Market conditions are tough for sellers. We have been contacted by some who are planning to close a deal this year to avoid a collapse in capital gains.”
“The capital gains will have a big impact,” said BGL’s Petryk. “As soon as the election results were in, we told our clients that they had to think about a different tax structure.
“Salespeople have a lot of decisions to make, but we tell our customers that they may not see a more favorable tax structure or higher multiples than they are today,” he added.
Private and family owners “have done the calculations and realize the tax rate could be substantial,” said Hinz of Grace Matthews. “It could make a lot of business owners think about a possible sale.”
For many owners, the amount they get from a sale is “their entire family’s retirement,” added Munson of MBS. “Taxes can have a huge impact on that.”