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:
- 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%.
- 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%
- 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?”