When should you sell your business?
Many businesses have had a challenging year, but not for the reasons you might expect. A booming economy, rising taxes, and eager buyers have created the perfect storm for business owners looking to sell.
Deals remain competitive.
Profiting from a growing pool of cash-sitting buyers has become more accessible. According to an industry report, this year’s deal volume and value are expected to outpace last year’s by a significant margin.
Throughout the pandemic, supply remained low, and others waited until the pandemic ended before selling. As more businesses reopened this year, pent-up consumer demand contributed to an increase in company value. Additionally, there was a dash to sell this year in anticipation of higher taxes in 2022.
Owners raising average selling prices increased by ten points from 36% to 38%, according to the NFIB Small Business Optimism Index. The previous high was 43% in April 1981.
Influenced by the prospect of increased taxes.
While taxes should never be the primary consideration when selling a business, they are for owners planning to retire in the next few years.
In the coming years, a sizable infrastructure bill and related proposals are expected to be partially funded by increased capital gains and ordinary income taxes on high-income taxpayers.
According to Biden’s tax plan, the top marginal rate on capital gains will equal the rate on a regular income. After 2022, taxpayers earning over $1 million ($500,000 if married filing separately) would be subject to the proposed 39.6 percent capital gains tax bracket. For those selling a business, a taxable event, such as the sale of the business, may temporarily push business income above the $1 million mark.
However, while Congress considers legislation, which could take months or even years, many business owners are concerned about higher taxes’ impact on future business sales.
Nothing should be taken for granted.
Whether you plan to sell your business this year or in the future, enlist the help of a qualified team of financial, legal, and tax advisors to ensure you get your money’s worth. This ensures that you get the best return on your time, energy, and money when the time comes to sell.
Success requires preparation and a well-executed plan.
It’s not as simple as handing the keys over to the new owner, family or not. There are many financial, legal, and interpersonal issues to address. That’s why business owners who prepare a succession plan well before selling their company typically gain an advantage. I tell business owners that they should continuously operate their business as if they are going to sell. Then, when an unexpected opportunity arises, the business is prepared. On the other hand, if circumstances occur, such as an illness, the seller can expect to sell the business better.
There are numerous ways to exit your business but choosing the best one for you can be difficult. Consider consulting a fiduciary advisor who is obligated to act in your best interests. Your advisor can help you identify the best buyers for your company, the best time to sell, the tax implications, and your desired level of involvement after the sale. A financial advisor with experience working with business owners in various industries and sectors will also help you negotiate and structure a deal that benefits both you and your buyer.
Bob Wolter is Mergers & Acquisitions Advisor of Creative Business Services/CBS-Global.