Is now the right time to sell your business?

The clock is ticking..........loudly. Have you given any consideration as to when or how you will begin the process of selling your small business? Let's consider two events that are colliding across the United States of America between now and 2013:

1. Long term capital gain tax rates will remain at 15% and there is the potential that you or more likely someone in your family may qualify for a zero capital gain tax rate, yes 0%, and that means no ordinary income tax on the gain either, yes zero.

2. The largest section of our population, the 1946 thru 1967 birth dates Americans are going to begin turning age 65 and considering retiring.

Long Term Capital Gain tax rates:

Congress has given the American taxpayer a reprieve. Long term capital gain tax rates will stay at 15% for at least 2011 and 2012. After 2012, who knows? Most pundits believe that capital gain tax rates will rise above the previously scheduled 20% rate. Though disagreement exists as to whether or not there will be any rate break for long term versus short term or long term versus ordinary income, the one relevant issue most of them agree on is that all rates are going to be much higher in 2013.

Is it really that big a deal? Let's use the front pocket principal to test if this change is such a big deal; that is, if the extra money is in my front pocket and I'm OK with you taking it from me, then no its not a big deal. Here's the example:

The amount of gain on the investment is equal to $1,000. I pay my federal tax on the gain at 15% (for purposes of this example we are ignoring state taxes). I put the rest of the money, $850, in my front pocket. Now I realize the tax rate on long term capital gains has changed to 20%. My buddy John walks over and takes $50 out of my pocket. Still OK?
What if rates go to 28%, he takes an additional $80 out of my pocket for a total of $280. Still OK?
Now let's get real and say the business is worth $1,000,000 and you started it yourself with sweat equity and your own money. That translates into very little basis. So the gain is equal to $1,000,000. Now the change in the tax rate costs you an additional $50,000 or even $130,000 if the rates go to 28%. Any pain now?
Now let's get creative, let's say the gain is $10,000 and the gain is owned by your son/daughter that is in or out of college but living on their own and filing their own tax return. Uner the current law they may pay no Federal capital gains tax (most states will still imnpose a tax on this earnings). That's correct ZERO, NADA, ZIPPO.
Now let's follow this thru using the same steps above, under current law no tax, under new law 20% tax, hand John $2,000, or if the rate goes to 28% $2,800, John loves ya baby! Any pain yet?

Baby Boomers

This is simple and quick. It has been estimated that the Boomers currently own 12,000,000 small businesses. The first wave of these boomers is beginning to reach retirement. In 2013, the first group will reach aged 65, the magic retirement date. What do you think they will want to live on? Social Security, the gratus of their loving kids? How about selling their business?

Now let's get scary, in 2006 the business brokerage business sold 12,000 businesses, the highest number of transactions in U.S recorded history. Experts estimate that approximately 1 in 10 business sales are actually recorded bringing the estimated actual number of businesses sold to 120,000. See a pattern? If in the next several years 12,000,000 businesses begin coming on the market and in the best year we closed 120,000 it's going to take around 10 years to move the Boomer's businesses. With that many transactions coming onto the market, what do you think is going to happen to the price of all these businesses?

Price multiples may change irrevocably for the next generation. Downward!

It takes between 12 and 24 months to sell the average business.

Still want to wait?

There is much to do, it will take time and it needs planning and consideration, but it is time to get started. Let us help you take advantage of the zero capital gain tax rates or just the lower capital gain rates, or the current availability in the market for capital acquisitions. Let us help you get started and gain piece of mind that you are in front of the curve for a change! Tick Tock..........

R. William E. Kruse III

"Happiness and moral duty are inseparably connected." George Washington

Hauk Kruse & Associates LLC
721 Emerson Road; Suite 120
Creve Coeur, MO 63141
314.993.4285 (w)
314.993.4288 (f)