Posts Tagged 'tax changes'

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This is the Year to Sell Your Business

Posted by George Walden on May 29, 2012

A couple of days ago, I was at a seminar on M&A advisory put on by two of Houston’s more prestigious firms; Barclays and Fulbright and Jaworski, LLP. With a room full of advisors- accountants, investment bankers, attorneys, commercial lenders and a few business owners I was struck by the slides presented on the tax ramifications of what is happening at the end of the year. I found myself asking the question,

“What are business owners waiting for?”

They started the session by asking the question, “How many of you believe taxes are going up next year?” Almost without exception everyone raised their hands. The panel then referred to a table on the tax breaks that were expiring at the end of the year.

Do you know that assuming the 2010 tax act is not extended by Congress at the end of 2012:

  1. Capital Gains Tax of 15% expires at the end of the year. Under current law, tax on the capital gain from the sale of a business will increase to 23.4%.
  2. Gift Taxes goes from $5,120,000 exemption with a top marginal tax rate of 35% to $1,000,000 exemption with a top marginal tax rate of 55%
  3. Estate Taxes goes from $5,120,000 exemption with a top marginal tax rate of 35% to $1,000,000 exemption with a top marginal tax rate of 55%

There was also an investment banking group that talked about multiples on EBITDA used in valuations. The average even during the downturn of 2008 and 2009 hadn’t changed. The average was 5.3X EBITDA for companies below 50MM. The premium company transactions were 7-8X EBITDA for companies usually closer to 250 Million. The only vehicle for greater valuations was going public and they thought in today’s current market 250 Million of enterprise value was a minimum for going public.

They also said that the marketing process for them to sell a company beginning to end is approximately 6 months.

So what does this mean to you the business owner?

I have seen a number of articles saying, “Now is the time to sell your business.” All are focused on the tax consequences of the repeal of lower capital gains. They all say “The government has tremendous debt and at least one party wants to tax wealthy Americans (often business owners) more than those who are less fortunate.”
Few have focused on what you can currently gift to your children. None have worried about your estate and the charitable goals I find most business owners wish to leave as a legacy to your good work.

Is it time to sell your business? I will remind you, “It is not what you make before taxes that counts but it is what you will keep after taxes that has the greatest impact on your life.”

Buyers of companies have to get a return on their investment and there are few stupid buyers willing to pay more then something is actually worth. So ask yourself, “How much more do I have to make next year if taxes go up to have the same net result as the favorable conditions of the current tax year? How much will I have to net to leave a legacy to my children next year that is equivalent to this year? Will I be able to protect their inheritance? Will I even have enough to give to the charity or cause of my choice? Who are you working for? The government or your family?”

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Capital Gains Taxes Are Going Up

Posted by Jim Gerberman on April 30, 2012

Donald Marron at the Tax Policy Center has a great article on the coming capital gains tax changes. You can find the original article HERE.

The top tax rate on long-term capital gains is currently 15%. That’s why Mitt Romney is spending so much time talking about his tax returns.

That revelation has set off a familiar debate about whether that low rate is appropriate. Often overlooked in these discussions, however, is the fact that the days of the 15% tax rate are numbered. As of this posting, it has only 342 left.

On January 1, 2013, capital gains taxes are scheduled to go up sharply:

First, the 2001 and 2003 tax cuts are scheduled to expire. If that happens, the regular top rate on capital gains will rise to 20%. In addition, an obscure provision of the tax code, the limitation on itemized deductions, will return in full force. That provision, known as Pease, increases effective tax rates on high-income taxpayers by reducing the value of their itemized deductions. On net, it will add another 1.2 percentage points to the effective capital gains tax rate for high-income taxpayers.

And that’s not all. The health reform legislation enacted in 2010 imposed a new tax on the net investment income of high-income taxpayers, including capital gains. That adds another 3.8 percentage points to the tax rate.

Put it all together, and the top tax rate on capital gains is scheduled to increase from 15% today to 25% on January 1. That’s a big jump. If taxpayers really believe this will happen, expect a torrent of asset selling in November and December as wealthy taxpayers take final advantage of the lower rate.

Of course, the tax cuts might get extended for all Americans, including high-income taxpayers. That’s what happened in 2010. In that case, the increase in the capital gains rate will be smaller. Because of the health reform tax, the top capital gains tax rate will increase from 15% to 18.8%. That’s still a notable increase, but would likely set off much less tax-oriented selling this year.

The only way that the top capital gains tax rate remains at 15% will be if the tax cuts are extended for high-income taxpayers and the new health reform tax gets repealed. That’s a key distinction in the election: President Barack Obama opposes those steps, while the GOP presidential candidates favor them (and some candidates would cut the capital gains tax rate even further).

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