As any business owner knows, business in the past year has been anything but usual.
Many have made the leap into owning a business for the first time during the pandemic, but after last year’s turbulence longtime business owners may be seriously thinking about moving on from their business.
From concerns about the Biden Administration’s proposed tax legislation to historically low interest rates making profitable businesses more attractive to prospective buyers, now is an opportune time for owners to seriously consider selling their business.
Proposed Tax Legislation Might Cut into Profits
Although the current proposed tax legislation hasn’t yet passed, the probability of tax reform is fairly high. One area that has many business owners concerned is the proposed increased tax rate on capital gains.
Historically, income from the sale of capital assets is taxed at a 23.8% rate. The proposed legislation would tax income from capital gains greater than $1 million as ordinary income under standard tax brackets – which could go up to 43.4% under the proposed legislation.
Because the net proceeds from the sale of business stock is considered a capital gain, this proposed change could impact many business owners. That income would be taxed at a much higher rate, cutting significantly into the net cash one would receive from the sale. It would also make it more difficult for owners to invest in long-term business growth. If that’s a concern, it may be a good idea to consider selling now.
Take Advantage of a Seller’s Market
The economy is turning a corner: vaccinations are widely available, and many businesses are starting to see signs of recovery after a year of uncertainty. This anticipated economic turnaround, coupled with historically low interest rates and cost of capital (i.e., the cost to borrow money) make now an attractive time for buyers to purchase a business.
Businesses that have been resilient throughout the pandemic and look like they will fully recover are very attractive to buyers. Valuations of these businesses are sometimes reaching levels even higher than they were pre-pandemic. With many holding on to cash during the pandemic, there’s pent up demand to invest, and many investors are ready to invest in growing businesses. Plus, with less projected uncertainty in the markets due to the pandemic, now is a great time to consider selling and/or transitioning a business to a willing buyer.
Decided to Sell? Make a Plan First.
So, you’ve explored all your available options and have decided to sell. Before you sign on the dotted line, first you need to:
- Start planning ASAP: If you decide to sell, planning for it should start as soon as possible. Ideally, owners should plan for the exit from the time the business begins. To develop a plan, ask yourself what the end goal of your business is: To transition to family, to your current management team, or to sell it to a competitor or other third party? Knowing your end goal will inform how to proceed and which option works best for your business. Allow enough time to see the entire process through, which can take as little as 60 days to as long as several months.
- Determine whether the business is valuable without you: For many businesses, the value is in the business owner. If there isn’t a clear succession plan in place, now is the time to bring on other business leadership or a trusted family member to take up the helm in your absence. Plus, some buyers want to take smaller businesses to the next level, and selling now could be a good way to keep it moving forward without you.
- Assemble a team: Put together a team of professional advisors to help navigate the sale process. This team can include a wealth advisor to help you understand how the value of your business fits into your personal wealth plan; an exit planning advisor to plan and enact an exit strategy for the business; a business broker or investment banker to help determine a fair value and locate buyers; a mergers & acquisitions attorney to navigate the legalities of the transaction; and a CPA to help put the balance sheets and models together, and who can propose some tax strategies to save the owner money in the sale.
After years of building a business, it can be difficult to let go of all the hard work you’ve put into it. However, proposed tax changes could cut into profits and market conditions are ripe to make businesses more attractive to buyers than ever. The sale or transition of your business is likely the largest financial transaction of your life, so it pays to plan and have a team of advisors working in your best interests. If you’re thinking about selling, bring the pros on board, make a plan, and do it now!
Jason Katz is a CPA, CFP®, CEPA, wealth advisor and principal with Bartlett Wealth Management, a wealth management firm with offices in Cincinnati and Chicago, which was recently named one of Barron’s top 50 Registered Investment Advisory firms for the second year in a row.