Is Now the Time To Sell?
Taxes May Be an Issue
By Jim Zipursky, Principal
Omaha Office, Corporate Finance Associates
We are often asked by our clients to assist them in determining the best time to sell
their business. While our crystal ball is
no clearer than yours, there are certain elements to be
considered when determining the best time to sell a
business.
The best time to sell your business is when you are ready to sell, but it
does help if the economy is in good shape. Also, buyers want a business with a bright horizon.
There is another factor looming
today regarding timing the sale
of your business. Today, we enjoy
some of the lowest capital gain tax
rates we’ve seen in decades. The
temporary cut, implemented by
President Bush, to 15% for long-term
capital gains, has been a boon
to both the economy as well as the
Mergers & Acquisitions market. But,
this low rate is temporary at best
and certainly will not last forever.
We know long-term capital gains are set to increase
to 20% on January 1, 2011, but do we really expect
Congress to wait until then to increase the rates? It is
probably safe to assume that if, as many of the pundits
predict, the Democrats carry both the White House and
Congress in the November, 2008 elections, long-term
capital gains tax rates are sure to increase, sooner
than 2011.
What does this mean to business owners? Assume you sell your
business for $10,000,000 today and the entire transaction is taxed
at long-term capital gains rate of 15%, resulting in you paying
Uncle Sam $1.5 million in taxes for the transaction. What if the
capital gains tax rate was 20%? Your taxes increase to $2 million,
giving your fellow tax payers a $500,000 bonus.
Taking our example one step further, let’s say you know your
business is sure to grow, so you decide to wait until 2009 to sell
the company. The Democrats carry both Congress and 1600
Pennsylvania Avenue and their first act is to increase capital
gains to 25%, retroactive to January 1, 2009 (President Clinton
already set the precedent for retroactive taxes). You did a nice
job of growing your business and it is now worth $12,000,000, a
20% increase from your $10,000,000 value in 2007.
You sell the business and receive a tax bill for $3,000,000
(assuming the new, hypothetical, 25% long-term capital gain tax
rate). You increased the value of your business by $2,000,000 but
only have an additional $500,000 to show for it, meaning you
effectively gave the government 75% of your additional incremental
income. This is hardly just desserts for your outstanding work.
We all know tax rates change. While
we at CFA never advise our clients to
sell because they fear a pending tax
rate change, we are not so naïve as to
underestimate the value of maximizing
our clients’ after-tax proceeds by taking advantage of today’s
favorable
economy and modest tax rates. After
all, it isn’t what you get; it is what you get to keep that is
important
when you sell your business.
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