14 Apr Tax Hikes are Coming. Buying or Selling a Business in 2021 Makes Great Financial Sense
As business owners and operators, we are always mindful of the impact taxes have on both our corporate performance and personal lifestyles. The opportunities offered by certain corporate structures, financing, and distributions could soon be changing and the impacts are forecasted to be significant. In the recently announced economic plan, the Biden administration is proposing changes to corporate tax, personal capital gains, along with adding new restrictions for passthrough activity for related party entities that will certainly have influence on corporate valuations, deal structures, and even liquidity events resulting from a sale or business merger.
While we are not tax attorneys or accountants, we are seeing an increase in business owners looking to capitalize on the current tax programs vs waiting for what might be around the corner, fearing significant added expense and potentially rendering a transaction “not worth it”. Bloomberg inventoried the proposed changes in a recent article:
- Raising the corporate tax rate to 28% from 21%
- Paring back tax preferences for so-called pass-through businesses, such as limited liability companies or partnerships
- Raising the income tax rate on individuals earning more than $400,000 a year
- Expanding the estate tax’s reach
- A higher capital gains tax rate for individuals earning at least $1 million annually.
It doesn’t take a rocket scientist to identify the implications of a 7% increase in your tax expense but some of these proposed adjustments will come with a rush to restructure entities and the flow of expenses through related entities that are commonly used during mergers and acquisitions.
Furthermore, and just as significant, at least for founders and owner-operators looking for an exit, is a proposal to treat long-term capital gains as regular income, which would tax proceeds from the sale of a business at 37% instead of 20%. Additional increases expected again in 2025!
The impacts are going to have a cascading effect on deal flow and valuations as sellers are going to be looking to offset the additional tax burden with increased sale prices. As an example: a business that was sold for 10x EBITDA would have to sell for 13.2x EBITDA in order for the sellers to walk away with equal proceeds.
In summary, if you are looking to sell today or perhaps have a plan to sell in the next 18 months you should really consider the benefits of structuring a deal now and avoiding the added complexity and unknowns that lay ahead. If you are considering buying a firm as part of your growth plans you should accelerate your process and work with an advisor to help execute ahead of any proposed changes. Revenue Rocket has clients on both the buy and sell side with the same ambitions as you and we’d be happy to help you investigate a possible combination.