Business Brokers: Tax Issues in Sight
Taxes. The bane of the business owner’s existence.
As professional business brokers, we deal with the tax issue all the time. Every transaction we’re involved in – in fact, nearly every conversation we have with a business owner considering selling – turns at some point to the tax issue.
And how can it not?
When we do a valuation of a business, the numbers we arrive at – and that we present to our client – are what we believe their business is worth in the market place where neither buyer nor seller is under any undue pressure to act. But our numbers do not reflect the impact of taxes on our client.
Many of our clients look at our valuation and don’t consider this fact. If we present a 25- or 30-page valuation report, for example, that suggests the most probably selling is $4.5 million, our client will deduct whatever liabilities he or she will be responsible for and BAM! The rest is going in his or her pocket.
But it ain’t true, Bucko. Between the closing table and the bank, our seller will run into an unsettling number of bureacracies with their hands out. And this beast must be fed!
Taxes on the Horizon
This topic is timely from an “advising-our-clients” point of view because the incoming American administration has assured everyone within earshot that the tax that has an outsize impact on what our clients ultimately end up depositing is going to pop significantly. President-elect Joseph Biden has promised an awe-inspiring increase in the capital gains tax, a burden borne by nearly every selling client we will ever represent,
If the Red Team holds the line in Georgia in early January, a firewall of sorts may help restrain – if not forestall – this damage. However, if the Blue Team claims victory, our clients will be in their cross hairs.
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So, what does that mean for us now?
Well, we received recently an interesting article from our colleagues in the United Kingdom where a frighteningly similar situation is unfolding right now. Many business owners are currently preparing to sell their business ahead of a potential increase in capital gains tax next year.
A review commissioned by the Chancellor of the Exchequer, Britain’s central bank, has recommended increasing capital gains tax rates to bring them in line with income tax rates, which could effectively double the cost of selling equity in companies.
Did the word “double” get your attention?
What are Business Owners Thinking?
Business brokers, M&A specialists and accountants in the major business regions of the U.K. report that they’ve been swamped with calls from company founders that have retained large stakes in their businesses and who fear being caught by higher taxes.
“Quite a few companies are asking us to find them a window to sell before March,” said one senior City financier. “Another founder/owner has asked to complete the sale of his business before March. It makes a difference in the price.”
If this proposed tax scheme is enacted, the changes would mean that business owners will face higher – significantly higher – taxes when they sell their business.
Heather Self, a partner at a principal London accounting firm, said many of her clients who had already been thinking about selling were now accelerating those plans. “If you were planning to do something in two years but by doing it now you can save 20% (or more) in tax you’re going to start moving,” she said.
Arun Birla, tax partner at a London-based law firm, when discussing the spike in activity from the firm’s business-owning clients, said, “If future changes are announced, then there is likely to be a flurry of M&A activity before they come into force, as investors seek to maximize their returns,” he said.
What we’re seeing in the U.K. is a glimpse of what we may see in the U.S. if the Blues gain control of the Senate.
The President-elect has proposed a tax scheme that would, in many cases, double the capital gains tax hit our clients would face. Do you think many business owners will take that hit with a smile. History suggests we should be skeptical.
And this means two things for us.
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1) First, we can expect many business owners who have been planning on exiting their business sometime during the next four to five years to accelerate their timeline bringing a surge in activity for us over the next 12 months or so while the political class tries to craft some legislation that will do the least amount of damage to their re-election chances.
More businesses coming to market could result in downward pressure on price. This is definitely something we need to discuss with our clients – especially those that have been on the fence about selling.
2) Second, though anyone with the ability to get a set of business cards printed can call themselves a business broker in many locales, there is a woeful lack of professional business brokers – properly trained and experienced – to handle even the current level of activity in our industry. An increase in that activity such as is likely to follow a legislative effort to double capital gains taxes in the U.S. is liable to increase the speed and intensity of The Silver Tsunami, the baby-boomer business sell off that is just beginning to break on the shores of the small business world.
The Bottom Line
A business owner with even a vague exit plan – one that includes a certain post-closing lifestyle – should be made aware of what might be around the proverbial corner and urged to give some thought to what the impact of such a tax increase would be to that plan and lifestyle because whatever they were counting on to walk away from the closing table with might become a mirage before the next administration is sworn in come late January.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you agin next Monday. In the meantime, I hope you have a safe and profitable week.