If you have owned a business for a long period of time and were considering selling, 2012 may be year for you find a buyer to take over your shop. The Presidential election and many open tax patches/increases loom on the horizon in 2013 which could alter tax rates substantially. 2012 could actually prove to be a much more a favorable year to play let’s make a deal for your business. Here are four reasons to consider selling your business now.
1.) Historically low capital gain rates - Currently, we have long term capital gain rate of 15% on most items. It has been very uncertain where this rate will head in 2012, but 20% at a minimum has been the number thrown about over the past year. If that occurs in 2013, it will represent a 33.33% increase in your capital gains tax. The Government will spin it as if it is only a 5% increase, but in really it is over 33%. Let’s say you sell your business for 1,000,000 and the cost basis of the business is $500,000 which would mean you triggered a $500,000 capital gain. Under the current rules, you would have about $75,000 of tax. If the capital gain rate moved to 20%, you would have a $100,000 tax. That doesn’t look like 5%, does it? It’s a simple example, but demonstrates the devastating effect of an increase in the capital gains tax.
2.) Borrowing rates are cheap – If you find a qualified buyer for your business, interest rates will be cheap for them if they have to finance the business at the sale. Just like you saw with home values in the mid 2000’s, you make be able to eke out an extra $50,000 or $100,000 on the price of your business because the low financing rates won’t make borrowers monthly payment substantially different. Getting financing for your buyer may be the difficult part. If they can’t get financing, then you can hold the cards by potentially earning out the business at a higher interest rates due to the tight lending requirements today.
3.) No extra Medicare tax – In addition to the potential for an increase in capital gains tax in 2013, it is likely to cost you approximately 4% more in tax if you wait to sell the business after 2012. The reason is that the tax code already has a baked in new 3.8% Medicare tax that begins in 2013 on unearned income such as investment income. This additional 3.8% tax is on the lesser of net investment income or modified adjusted gross income in excess of $250,000 for people who file jointly, $200,000 for single filers, and $125,000 for people married filing separately. This idea of net investment income includes gain from the sale of property (other than in the course of business). So it could apply to the sale of an interest in a business. However, for businesses such as partnerships, LLC’s, and S Corporations, there are some technicalities around only ‘net gain’ which may mean that not all of your gain would be subject to this Medicare tax. Obviously, you want to get yourself a qualified CPA before you take any action at all.
4.) Uncertainty of health coverage – One of the big issues right around the corner is what will happen with health care. The way it stands today, it looks like businesses with more the 50 employees may be required to provide health care coverage. If costs continue to rise for providing health care coverage like they are today, (it seems that even in a depressed economy health care costs defy gravity) this could potentially put a dent on the price of the business due to the risk a new buyer would assume.
You should always consult a qualified business broker, financial advisor, CPA, and/or attorney before you sell your business. For most owners, your wealth may not be in a brokerage account or an IRA. The retirement plan you built for yourself is predicated on maximizing the sale of your business. If you are a long time owner, 2012 could be the year to pull the rip cord.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc
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