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After a challenging year, many business owners are calling it quits in 2021, but not for the reasons you may think. A surging economy, the prospect for rising taxes, and buyers flush with cash have created a perfect storm scenario for business owners looking to sell.
A growing number of buyers with cash on the sidelines has created significant opportunities for business owners ready to sell. According to a recent industry report, while the pace of recovery has varied among companies and sectors, and some have faced fundamental changes as a result of the health crisis, U.S. deal volume and value overall are up from 2020, with 2021 deal volume expected to outpace last year.
While demand among buyers continued to grow throughout the pandemic, supply remained relatively low. Many owners of businesses that were adversely impacted by the pandemic were waiting to recover before selling. However, as more businesses reopened this year, many owners have seen a resurgence in business value due, in part, to pent-up consumer demand.
According to the NFIB Small Business Optimism Index, the net percent of owners raising average selling prices increased 10 points to 36%. That’s the highest reading since April 1981 when it was 43%. In its quarterly report, BizBuySell said the median sales price was $350,000 in the first quarter, a 30% jump from a year ago.
While the decision to sell a business should never be predicated on taxes alone, the potential for higher tax rates is a consideration, especially among business owners planning to retire in the next few years.
President Biden ran on a platform that included raising levies on capital gains and ordinary income for high-income taxpayers, to help pay for a large infrastructure bill and related proposals in the coming years. One of the centerpieces of the Biden tax plan is to increase the top marginal rate for capital gains so that it is equivalent to the top rate imposed on ordinary income. The proposed 39.6% capital gains bracket would apply to taxpayers with earned income in excess of $1 million ($500,000 for married filing separately), indexed for inflation after 2022. While this would not impact the vast majority of taxpayers, a taxable event, such as the sale of business, could temporarily push business income over the $1 million mark for those selling a business.
While these are only proposals until Congress enacts legislation, which could take some time or not happen at all, many business owners are weighing the potential impact that higher taxes could have on the future sale of a business.Whether you’re thinking about selling your business this year or several years from now, prepare now by enlisting the guidance and advice of qualified team of financial, legal and tax advisors who can help ensure you get as much—or more—out of the business as you put into it. That helps to ensure that when you’re ready to sell, you get the highest possible return on your investment of time, energy and capital.
Succession is much more complicated than handing a set of keys to the new owner, whether they’re family members or not. There are complex financial, legal and relationship dynamics that must be considered and ironed out. That’s why business owners who develop a succession plan well before they’re ready to sell the business generally find themselves at an advantage. With a plan in place, you’re better prepared when an unexpected offer comes your way, or if unexpected circumstances dictate the timing of the sale, such as a sudden illness, so you’re not compelled to sell at an inopportune time.
While there are many alternatives for how you may choose to exit your business, defining the exit strategy that’s right for you can be complex. Consider enlisting the help and advice of a fiduciary advisor who is obligated to put your interests first. Your advisor can help you identify the most appropriate types of acquirers for the business, preferred timing of the sale, tax consequences, and your desired level of involvement with the business, following the sale. A financial advisor adept in working with business owners across multiple industries and sectors will also bring much needed resources and expertise to the business valuation process, as well as negotiating and structuring a deal that’s right for you and your buyer.
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