Historic low interest rates during the past several years have not only been a catalyst for economic growth, they've also created enormous demand by private equity firms seeking to invest in a wide range of small businesses. In turn, these investments have created a "once-in-a-generation" opportunity for thousands of small- and medium-sized businesses, raising their value and minting new millionaires across our nation.
Data from BizBuySell Insight Reports shows that a record number of small businesses were sold in the third quarter of 2017. A total of 2,589 transactions were reported nationwide, a 24 percent increase from this time last year. This puts the number of sales so far this year at 7,491, making it a record-breaking year for small-business transactions. Just as important, the median sales price is also up year-over-year, by about 15.7 percent.
According to Thompson Reuters, private equity funds raised more than $340 billion in 2016. And with a 12 percent increase in the number of private equity funds this year, 2017 expectations are similarly high. In recent years, I've worked with several business owners, whose companies were valued from $1 million to $100 million.
But with the Federal Reserve set to meet and raise interest rates on December 12–13 — and possibly throughout 2018 — the window to take advantage of the economics of these deals may be starting to close. Borrowing costs will rise, making it more difficult for private equity firms to profit from future acquisitions.
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To take advantage of this window, the entrepreneurs that created these businesses need to determine soon if they want to cash out. As a financial advisor who works with many entrepreneurs, here are a few items to help business owners maximize their potential profit and tax benefits.