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Capital Ideas for Private Business

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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