Now or Later?
Owners of middle market companies nearing retirement need to consider when to sell their companies in order to maximize after-tax proceeds. Key contributing factors in their decision include the following:
- What will happen to the capital gains rate under a new president /administration;
- Will higher industry multiples return;
- Will financing be available; and
- What exit planning is required to ready the company for sale?
Provided below is a hypothetical example that models the key factors of the owner's dilemma presented above. This example assumes a single shareholder/owner and a corporation sold in a stock deal at fiscal year-end, assuming zero tax basis. For simplicity, EBITDA is held constant, permitting us to understand the impact of a slight increase (1x) in the multiple and an increase in the federal capital gains tax rate from 15% to 20%, as suggested by President Obama.
(000s omitted) |
12/31/2008 |
12/31/2012 |
EBITDA |
$ 3,000 |
$ 3,000 |
Multiple |
4 |
5 |
Pre Tax Proceeds |
$ 12,000 |
$ 15,000 |
Capital gains % |
15% |
20% |
Tax Due |
$ 1,800 |
$ 3,000 |
After Tax proceeds |
$ 10,200 |
$ 12,000 |
Naturally over a 4-year period, an owner may improve many aspects of his/her business, generating greater EBITDA/value and multiples. Items that traditionally create value include succession and exit planning, improving margins, technology investments, increasing capacity for growth, audited financials, reducing customer concentrations, broadening product lines, executing customer contracts, finalizing licenses and consistent increased year to year earnings. An excellent way to identify the "value gaps" and take steps to enhance value is to engage a firm such as Schenck to perform a diligence review, or evaluation of the company, well in advance of selling.
For the seller contemplating a sale in the near future, the current lower capital gains rate would indeed take some of the "tax bite" out of selling. However, if a seller holds "paper," as will likely be more common in today's contracting credit markets, the installment sale proceeds may be subject to unknown future tax rates in the year/period received, and a quick sale may not gain the full capital gain benefits.
Knowledge of the industry cycle remains germane as well in any decision to sell. While it may be accurate that the general economy is soft, resulting in trillions of dollars in lost value for public and private companies, some industries may be at their zenith in terms of sales, prospects for growth and multiples (such as technology and renewable energy sectors).
Conventional wisdom such as "Now is a good time to sell given a favorable capital gains rate" is not the full picture and may be too simplistic. Further thought must be afforded to the areas presented in this article in order to maximize after tax proceeds in the sale of a business.
Jim Gettel and Lou Banach are Managing Directors of Schenck M&A Solutions and have over 20 years of experience helping businesses grow. As part of Schenck Business Solutions, one of the largest CPA and consulting firms in the country, Schenck M&A Solutions provides a full range of merger-and-acquisition-related services including business sales, acquisition searches, business financing, recapitalizations and turnarounds, valuations, due diligence services, cultural compatibility analyses, and assistance with post-acquisition integration.
Don Kossow has extensive experience in advising clients on a wide range of tax strategies and planning in a variety of areas, including business succession planning, mergers and acquisitions, tax incentives, multi-state taxation, and flow-thru entities. Don joined the Milwaukee office of Schenck as a shareholder in 2006 after 20 years as a partner with a large national accounting firm and over 10 years before that with a large local accounting firm. Don has been a speaker at numerous law and accounting conferences on various tax topics.
November 2008
|
