The entrepreneurs and families are generally straight-up individual taxpayers, and are therefore very sensitive to changes in capital gains tax rates or laws. The private equity firms, however, are much less so: They raise their funds from large investors, generally in chunks of $5 million or more at a time, so many of their backers are non-taxpaying entities like pension funds and charitable endowments. Corporate acquirers are, more often than not, intent on buying and running businesses for the long term, and therefore are also less sensitive to capital gains taxes.
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What we saw play out last year was many tax-sensitive sellers come to the table seeking exits before an anticipated capital gains tax rate increase. (We had several clients who said, in effect "Get this deal done by December 31st or we're not selling.") That was a double-edged sword in negotiations, with some buyers trying to take advantage of the date sensitivities of the sellers through overly aggressive due diligence and price adjustment demands. Some sellers dished it right back, however, essentially saying to buyers, "Quit messing around – we close by year-end or we don't close at all."
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Given that many private equity firms also had 2007 and 2008 vintage funds (both were record fundraising years for the PE industry) whose investment periods were drawing to a close, the markets got hot and deals got done.
What I'm seeing take shape for the year ahead is the drivers and laggards in the market switching places, more or less: Private equity funds that gorged themselves on the tax-driven buffet last year are feeling a bit bloated and examining their own swollen portfolios for divestiture candidates. And entrepreneurs and family sellers are now frequently expressing a "there's no particular hurry here – we'll wait it out" mindset.
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