This is the final installment of a 10-part series examining 10 reasons why 2010 is a great time for business owners to consider selling their companies.
Reason No. 10 – Federal Tax Liabilities
President Obama’s signing last week of the tax compromise in Washington is just the latest example for business owners of how “we don’t know what we don’t know until we know it.”
The point being that time and time again one of the consistent objections we hear from business owners in regards to potentially selling their companies has to do with taxes.
You can really break down people into three different groups when it comes to this topic – those who believe the current tax climate is not optimal for them to sell in, those who believe the tax situation will improve so they want to wait to sell, and those who believe the tax situation is quickly getting worse so they better not sell. So let’s examine each of these …
The current tax laws are not optimal … this argument does have some validity, depending on a seller’s specific financial situation. If a business owner needs to net X dollars from the sale of his business, but after taxes he nets much less than that amount, there’s really no room to argue that point. Having said that, the point here is not necessarily directed at those types of situations, but rather on the mentality some business owners have that “taxes” make the sale of their businesses impossible to stomach. The reality is that there will always be taxes that impact the sales of companies, so don’t use that as an excuse not to move forward. Instead, investigate what you can do to make your sale as lucrative as possible and limit the impact of taxes on your bottom line.
The tax implications will certainly improve, so I’ll wait … this is a dangerous theory to base such a large decision on. Could the tax liability of a business sale improve from what it is today? Sure it could. But remember it can also get worse just as easily. Those business owners who are waiting for new laws, new bills, even new administrations may be setting themselves up for a lifetime of frustration when it comes to tax legislation that will make the sales of companies more beneficial to the owners. Tying back into the point above, a better strategy is to analyze the current tax liability with your tax advisor and develop a transaction strategy that makes the most sense for you today.
Things are just getting worse, so I better not sell now … the recent tax legislation from last week is a great example of why this is not a good strategy to implement. I doubt there were many people who, 12 weeks ago, thought there was any chance Obama would extend the Bush tax cuts … but here we are and it’s been done. Many people worry about what’s to come, and they’re afraid if they commit to selling their companies today certain tax issues could change during the period they are listed. Then by the time they sell the tax implications will be much less favorable. Without concrete facts, however, this is a weak excuse not to sell your company.
Regardless of a business owner’s “fear” when it comes to tax liabilities, one thing remains true and unchanged:
You just never know.
So if you have a solid company with a successful track record that is providing a good living for you, the best advice someone can offer when it comes to tax liability is simply to analyze the current laws in place and then determine what taxes are going to mean to your specific transaction. There are several strategies that can be implemented to lessen that liability. So rather than avoiding a beneficial sale of your company, why not figure out the most advantageous way to make the transaction work for you?