One major issue affecting the plastics M&A market in 2021 is the possibility of the U.S. government increasing the capital gains tax rate from 20 percent to 39.6 percent. This proposal is not yet in place — and could be reduced when passed — but it's got the attention of plastics owners, whether they're financial firms or longtime owners looking at retirement.
"We're seeing a number of business owners who might want to sell sooner than later; they're not waiting for the tax increase," said Bill Ridenour, owner of Polymer Transaction Advisors Inc. in Foxfire, N.C.
"The big driver today is family-owned firms getting ahead of capital gains taxes," added Weil at Mesirow. "They've made it through COVID and their businesses are doing well, but some owners are tired. Usually, if you've been contemplating a sale for some time, capital gains can be a catalyst in deciding to sell."
Capital gains "is a factor," said Matt Miller, managing director of BlueWater Partners LLC in Grand Rapids, Mich. "It's driving a lot of [private equity] groups to seek exits. And private owners who had been thinking about timing and their plans might want to sell now."
Complicating the issue is the possibility that the increase could be retroactive to April of this year, meaning owners might have to pay the higher rate even if they sell before the end of 2021. Several pros said this scenario isn't likely, but it can't be ruled out.
"It's a reality check for owners, but if it's retroactive, there might not be a race to get deals done by the end of the year," Blaige said.
"There's a lot of uncertainty regarding changes in capital gains taxes," added Phil Karig, managing director with Mathelin Bay Associates in St. Louis. "There's at least a possibility that the increase might not apply to 2021 sales."
Sellers looking to sell in advance of the increase also might be pushed by buyers to take a lower price just to get a deal done.
"Every buyer is looking to leverage capital gains to their advantage or to get a deal done quickly," said Peter Schmitt, managing director at Montesino Associates LLC in Wilmington, Del. "It gives leverage to both sides.
"If you ask an owner today, they want to know what's going to happen in the next five years, how long will multiples remain high and how much can they hang onto when they sell their firm," Schmitt said.
Regardless of the impact, discussions of capital gains aren't going away anytime soon.
"We expect to see another surge in the second half because of capital gains," PMCF's Hart said. "Market conditions are strong for sellers. We've been contacted by some who want to get a deal done this year to avoid a capital gains hit."
"There's going to be a big impact from capital gains," said Petryk at BGL. "As soon as the election results were in, we told our clients they had to think about a different tax structure.
"There are a lot of decisions for sellers to work through, but we're telling our clients they might not see a more favorable tax structure or higher multiples than they are today," he added.
Private owners and family owners "have done the math and they realize the tax rate could be significant," Grace Matthews' Hinz said. "It could cause a lot of business owners to think hard about a potential sale."
For a lot of owners, the amount they get from a sale "is their family's whole retirement," added Munson at MBS. "Taxes can have a big impact on that."