In April 2024, I wrote an MTD column on uncertainty in presidential years and how it impacted deal activity. I reviewed all kinds of research in academic journals that showed there definitely was a lag in dealmaking running up to an election as compared with the months following an election.
The gist of my column was, however, that since we had two well-known quantities in Trump and Biden running for president, where was the uncertainty? We all knew what would happen if either prevailed so we could all plan accordingly.
I did leave myself an out by saying that “unless something unexpected happens,” it was looking like Trump versus Biden. Well, that something unexpected happened on July 21, when President Biden dropped out.
Now, with relatively unknown Vice President Kamala Harris taking Biden's place and former President Trump proposing even more populist economic policies, all bets are off regarding who will win and what they will do after winning. It’s a tight race and sure to be a photo finish. (Editor’s note: This column was written several weeks before the Nov. 5 presidential election.)
But despite this election year’s uncertainty, I’m still predicting that the remainder of 2024 and the first half of 2025 will defy this trend toward lower deal activity in an election year for multiple reasons. We’re already seeing prospective sellers we talked to three years ago reapproaching us to represent them for sale this year. It’s getting busier and we’re pitching a lot.
One new development all business sellers are focused on are taxes and the prospects for tax increases. The 2017 Tax Cuts and Jobs Act (aka the “Trump Tax Cuts”) are set to expire at the end of 2025. Already the Harris campaign is proposing to raise capital gains taxes on high income earners from 20% to 28% and proposing to raise the corporate tax rate from 21% to 28%.
The make-up of the Congress and the degree to which it can get bills enacted will matter a lot as to what gets passed. But regardless of whether you are an S-Corp or a C-Corp, under a Democratic administration and Congress, sellers of businesses are likely to pay more when they sell their business and C-Corp owners will pay more tax on profits even if they keep their business.
We’ve heard this concern about taxes directly from nervous clients already. This tax uncertainty will be fully answered as 2025 plays out. A prospective tax increase will incentivize many sellers, regardless of party affiliation, to go to market now and throughout 2025. We saw some of this same dynamic play out partially in 2019, although COVID-19 dampened the rush to the exits that year.
Recent economic reports still show an improving economic picture, with September job growth exceeding expectations. Also September's inflation rate was 2.4% and is moving even closer to the Fed's target rate of 2%. GDP growth in the second quarter exceeded 3%. The Fed started reducing interest rates in September by a quarter point, a much-awaited development. And consumer spending is still strong and projected to remain so through the end of the year. Holiday spending is projected by Deloitte to exceed last year by 3%.
An improving economy boosts most businesses’ bottom lines, so sellers are in a better position to sell. As of this writing, the Dow Jones Industrial Average is a whisker from its all-time high. A rising tide lifts all boats. In this case, lower interest rates and a higher stock market bode well for company valuations.
As mentioned several times in MTD columns and editorials, private equity now has $2.59 trillion in dry powder on the sidelines. Private equity firms will leverage this with the $1.3 trillion in private credit available to them and will put it to work in transactions. If the stock market stays high, this will allow room for private equity and strategic buyers to pay higher valuations.
Deal activity is cyclical. The total value of M&A in the U.S. was down 25% in 2023. That was the worst year in dealmaking in a decade. When previous years’ activity has been very low, one might reasonably expect to see that turn around. I certainly do.
