Biden’s tax changes could mean it is time to sell.
There’s an iceberg ahead for business owners and it is Biden’s tax changes.
The clock is ticking. The window of opportunity is closing. And these hefty tax law changes could cost you dearly if you are considering selling your business.
The time to sell is now.
Let’s start with the math. Selling a business, would cost you 23.8% in taxes under the current rules. By next year, that tax bill could reach as high as 43.4%.
Now, selling a private business is not an insignificant task and a process like this should never be rushed. Historically, I have never insisted a client make a major decision, especially one as important as selling their business, with taxes leading the discussion. However, the changes being recommended by the Biden administration on capital gains makes this a discussion worth having.
The primary change to the capital gains’ tax that is being recommended would not impact most Americans, as the income threshold is rumored to be $1 million before the highest rate would kick in. However, this would impact a large amount of private business owners on the sale of their business as the sale price in many cases will be more than $1 million.
Using the 19.6% increase for those at the highest bracket and a business sale of $5 million, this could increase the taxes owed on the sale by just under $1 million.
Does this mean every business owner should immediately drop what they are doing and put the business up for sale? Of course not. I would only consider moving forward on looking at a sale this year if you were already considering selling in the next 12 to 18 months and you were both mentally and financially ready. Otherwise, your business may not be in the best position, which would likely lead to few offers and lower values that would offset the benefits of getting the sale completed before the end of the year.
On the flip side, if you have already started thinking about selling, you would need to increase the value of the business by 20% to net the same value from the business, just by completing the transaction after this year.
Simply due to the timing of a tax law change, you may need to spend a lot of effort, and potentially years, to grow the value of a business to net the same amount that you could get by selling this year.
One important consideration: Tax laws change all the time. Just a few years ago the Trump administration’s tax cuts were passed and now many of those will be undone. The same thing could happen four years from now.
While selling now doesn’t make sense for every business owner, for those that were already considering a sale, selling this year – or at least getting a proper assessment of your business – makes sense.
Above all else, remember selling a business is a process that may uncover other gaps and opportunities that you were not aware of. Remember too, this is a process that can take nine to 12 months to complete and as we approach the midway point of 2021, it could be difficult to squeeze this process into six months, but it is important to know the facts, assess your business and crunch the numbers as you decide if it is time to sell.
And, no matter what you decide, know that we have your back.
All data points listed within can be found here, MarketWatch: Avoiding Biden’s proposed capital gains tax hikes won’t be so easy – or will it?
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.