In light of whispers about potential tax changes that will make the sale of businesses more expensive in the not-so-distant future, many business owners are looking at potentially selling their business before the end of 2021. Although none of these proposed changes have been presented to Congress, there has been enough chatter in the background to make financial and tax advisors believe that the current capital gains structure will be altered significantly within the next year.

As you may recall, Brian recently participated in a panel where he discussed M&A strategies with a client who successfully sold his business during the pandemic. {Start VIDEO at 31:40}

Here are a few key points that were discussed in the presentation:

– Negotiate from Strength

– Continue to Manage the Business throughout the Transaction

– Surround Yourself with the Right Advisors

In addition, there was one topic that was mentioned in the presentation but warrants more detailed consideration in this article — fear-of-the-unknown.

Fear-of-the-unknown is related to the potential changes in the capital gains tax structure. Under the current structure, the maximum income tax rate for a long-term capital gain is 20%, and both short- and long-term tax rates were generally lower than ordinary income tax rates. Under rumored guidelines, that differential will change and make the tax rate on a typical transaction potentially go up by hundreds of thousands of dollars, decreasing your potential after-tax proceeds by as much as 30%. In other words, you would need to have a purchase price about 30% higher in the proposed tax rate world vs. what the current tax rate is today. This potential change in the tax code will have a huge impact on household wealth for many business owners thinking of selling their business in the next couple of years; however, this is a significant decision to make, and it’s hard to advise someone to make this type of decision with so much uncertainty in the air.

So if you’re a business owner who is thinking about selling and reading this, what should you do?

The answer is: it depends. On the one hand, if you’re not thinking of selling your business and are happy with the way things are, you should continue to run your business as efficiently as possible and worry less about changes that may or may not occur and focus more on what you can control, e.g. keeping customers happy.

If you might be thinking of selling your business within the next year or two, you might want to strongly consider ramping up your efforts to sell your business to avoid potential taxes that will eat up a significant amount of your proceeds. However, as experienced M&A advisors, it will be extremely challenging to start the process of selling your business now if you haven’t begun the process already.

Takeaway: Selling your business is an important step for any entrepreneur and should not be taken lightly. In the current environment, it’s important to have the right advisors to help you weigh all the risks/benefits before deciding to sell your business and enter a new phase of life. For a free diagnostic on what your business needs to do to become saleable, contact us at info@acceleratingcfo.com.

Brian Califano