SaaS Founder Focus in an Election Year: Separating Hype from Market Realities

In the age of real-time updates and relentless news cycles, it’s easy to get swept away by the emotional impact of the media—and that’s never more true than during an election year. As we head into 2024, the relentless media coverage will shape narratives, influence sentiments, and even drive business decisions as pundits speculate about the effects of one or the other party taking office.

Under these circumstances, it’s natural to wonder how high the stakes are for founder-led SaaS companies. Is now the time to think about selling?

Before the 2020 election, we saw a "rush to exit." SaaS founders sought to sell their companies ahead of any major political changes that could affect capital gains tax rates and potentially reduce their post-tax take-home cash. Their worst fears, however, never materialized, and while there have been many influences on the M&A market, the White House hasn’t been one of them. 2020-1H2022 even ended up being one of the best tech M&A markets of all time.

Here’s why you shouldn’t worry about the election when it comes to timing your exit or capital raise transaction—and what you should be paying attention to instead.

The Real Impact of the Election on Business

The biggest impact that the White House has on business at the federal level is on taxes. When Biden was running for office in 2020, there was enormous focus on his proposed tax plan. Many founders speculated it would lead to higher capital gains tax rates, which resulted in them accelerating their exit plans and time to market. But while there have been some changes to the tax code under the current administration, they were not nearly as drastic as predicted.

If historical capital gains and income tax rates are anything to go on, trends shouldn’t be much different this time around either.

Democrats are traditionally more aggressive about raising taxes, particularly on corporations. However, with the current tax structures already in place under a Democratic administration, a second Biden administration is unlikely to introduce radical changes.

Republicans, on the other hand, are traditionally more likely to cut taxes. If a Republican nominee wins, the tax rate will most likely become, if anything, more favorable for businesses and high-net-worth individuals. Even if that is the case, however, those changes wouldn’t take place until 2025 at the earliest.

Whether next November sees a Democrat or a Republican in office, you shouldn’t anticipate changes to the tax code that would drastically affect the sale of SaaS businesses, either negatively or positively, over the next year. We strongly advise that founders not make decisions about exits based solely on what might happen in the election.

The Real Market Worry: Inflation and Interest Rates

For businesses, inflation and interest rates play a far more pivotal role than election politics. Politicians may try to influence it, but whoever is in office has no direct power over the Federal Open Market Committee (FOMC), the branch of the Federal Reserve that makes the interest rate determination. It will make decisions based primarily on inflation rates, which are influenced by far more complex factors than who controls the White House.

In its effort to keep rampant inflation under control and force sellers to stop raising prices, the FOMC has raised interest rates 11 times since March 2022 and has indicated that they may raise rates one more time in 2023. Some economists predict that it will begin cutting rates in 2024, but it remains to be seen exactly when and by how much.

While the rise in interest rates does seem to have dampened inflation, it has also resulted in higher borrowing costs, making it more expensive for buyers to finance transactions. With borrowed money becoming more expensive, buyers are becoming more selective and due diligence is becoming more comprehensive. In turn, these factors can exert downward pressure on valuations while raising transaction costs for buyers and sellers alike.

What Founders Can Do Now

At 3.7% as of August 2023, inflation is still higher than the Federal Reserve’s target rate of 2%, but interest rates seem to be leveling off. It looks like we are entering a period of higher but stable rates for the foreseeable future. Of course, no one has a crystal ball; if inflation rates were to spike again, interest rates and, consequently, valuations, could be negatively impacted.

We advise founders to keep an eye on inflation but not to obsess over it or the election, both of which are beyond our control. Instead, we advise working on what is within your control: creating the best possible company to weather all circumstances and provide the best possible exit opportunity in the future. Focus on your fundamental business metrics, cost structure, and creating a great product that adds value.

Above all, do not let the election, either the media frenzy leading up to it or its outcome, affect your exit decisions. There are a multitude of more important factors to consider. If you’ve decided to sell, a good banker can help you create a viable exit strategy and position yourself for a positive reception from the market and a higher valuation.

This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.