The U.S. Presidential Election certainly garners its fair share of attention every four years, however, it is safe to say that the 2020 election was unlike any other year. According to the U.S. Chamber–MetLife survey, small business owners were more interested in this election than in the previous election.
There is no doubt that the climate leading into the election- specifically the pandemic and the resulting economic impact - introduced a series of challenges for businesses. Several companies have been coping with what seems to be the ‘new normal’ given strict social distancing regulations. Others are relying heavily on remote workplaces and touchless experiences, yet still have financial concerns.
However, with all the scrutiny and attention on the election out of way, there is a new President-elect, one that is advocating higher taxation, more stability, and better international relations, among other things. Let’s take a look at these items and how they affect private market deal-making:
Raising Taxes on Companies & Individuals
It is no secret that a change in the White House could result in significant tax hikes for business owners and investors. The proposed changes will have an impact on both companies and individuals alike.
The Biden administration has been unwavering on raising corporate taxes, saying that raising taxes will be a top priority provided that Congress agrees. The proposed move would raise the corporate tax rate from 21% to 28%.
The President-elect was quoted saying, “We’re going to double the tax on foreign profits so we don’t encourage people to leave and build abroad.” At the same time, he has pledged to offer tax incentives to companies that bring international operations to the U.S.
The Biden administration has also proposed increasing personal taxes in multiple ways. Most notably, by lifting the top marginal income tax rate from 37% to 39.6%, increasing Social Security taxes on income over $400,000.
Further, the plan suggests categorizing and taxing capital gains as ordinary income on income over $1 million all while increasing or creating tax credits for those with low incomes.
Naturally, it’s critical that business owners who are positioning themselves for a sale (or any liquidity event) and prospective buyers seeking out acquisitions to carefully assess their timing, potential tax exposure, and structure.
Managing the Pandemic
Managing the COVID-19 pandemic will be the No. 1 challenge facing the Biden administration. Ultimately, the choices the President-elect makes on how to manage the crisis will have a carry-over effect for the private market economy and deal-making overall.
Earlier this year, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law. Within the CARES Act, the Paycheck Protection Program (PPP) was established to provide emergency forgivable loans for small businesses to stabilize their payroll and various other costs.
What is unique about the PPP loan is that depending on a company's eligibility, a portion of the full amount of the loan can be forgiven. As a result, PPP loans have complicated deals as there is uncertainty stemming from evolving information around loan forgiveness eligibility and payback periods. According to recent data from the International Business Brokers Association (IBBA), one-third of deals have been delayed due to unknown PPP status, another third are in gridlock due to negotiations around who (buyer or seller) will be responsible for the loan if it is not forgiven by the government, and lastly, around 12% have experienced bank refusals to lend with an outstanding PPP loan.
Slow & Steady Recovery
The biggest factor of healthy buying and selling activity is an overall strong economy- i.e. individuals and companies willing to take on debt and risk to invest and grow. At the center of the economy currently, however, is a global health crisis.
A Verizon Business Survey indicates that 92% of small business owners are concerned with how the pandemic has affected the financial wellbeing of businesses in the US. While this figure is down from 96% in April 2020, challenges still persist.
Joe Biden and his team have laid out a seven-point plan to beat the virus and handle the pandemic. The plan will be backed by science, will promote transparency & communication, and be advised by a newly formed COVID task force.
Within this plan Biden wants to ramp up PPE production- this will spur ahead American-sourced and manufactured products and allow access to the critical supplies needed (masks, face shields, etc.). As a result, businesses will be able to stay open and be equipped to weather the storm. In addition, the President-elect has promised to invest heavily in vaccine manufacturing and distribution as well as augmented testing.
Biden also made it clear that the U.S. needs another stimulus bill- but, at this time it is unclear how many, how much, and if the criteria for acceptance would change. We do know, however, that during his presidential campaign he indicated that the focus will center around more money for small businesses, emergency sick leave for everyone who needs it, among other things.
All of which are aimed at protecting the health of the general and the overall economy.
This summer's executive order forcing the sale of popular social media app TikTok, owned by China’s ByteDance Ltd., by President Trump was a clear example of how foreign relations can impact dealmaking.
The ongoing trade war with China has shrunk the value of acquisitions of U.S. companies or assets by Chinese acquirers to $13 billion this year, from $93 billion in 2016. The promise of easing this relationship (as well as others) under the Biden administration could be a net positive for cross-border transactions.
The Big Picture: What a New President Means For Closing a Deal
While it is certainly a fool's game to predict the future (go back and ask anybody from January 2020), historically, an election year comes with sluggish activity in the private market, given that buyers don’t like uncertainty. There is a potential for short-term disruptions, particularly in industries that can be widely affected by a change in policies (ex: banking, healthcare, energy, etc.). With that said, savvy buyers, the kind you want to attract to your opportunity are looking for a well run, profitable, growing companies all the time, regardless of who’s in office. Below is a graph that shows M&A activity since 1980- a span in which the office was held by Democrats and Republicans:
As shown, there are ebbs and flows in deal activity from both sides of the aisle, regardless of who’s in power, Democrats or Republicans. Even in the most challenging years, deals keep on closing. A change in national leadership has not historically had a long-term impact on the appetite of buyers. So fret not, the show will go on!