How to Navigate Tax Increases When Selling Your Business
Within the past two years, business owners have witnessed a rise in taxes. Since the redirection of government spending towards economic stimuli and vaccine deployment, as well as proposed infrastructure projects, a huge debt was created. 2023 has certainly proved that the time has come to repay it by raising tax revenue through increases in corporate tax rate, generational wealth transfers (estate taxes) and capital gains.
Depending on the capital structure, as well as the terms and conditions of the sale and the prevailing capital gains tax rates, business owners looking to sell in the remainder of 2023 and in 2024 can expect to see the increases eat away at the cash at closing. Sellers who put off selling will find that they will have to achieve either greater multiples and experience increases in EBITDA in order to replicate 2021 deal metrics.
Getting compensated for the value you’ve built
No matter how the economy affects the tax rates, remembering a few things will help you stay ahead of the curve and maintain your leverage.
1. Selling should never be a last resort
When your business is doing its best, that’s one of the best times to make your move. While this may feel counterintuitive, selling when things are good gives you increased leverage. Selling when things feel desperate or like a last resort dilutes your position.
Considering external economic conditions is important when preparing to sell your business but know that having an experienced team by your side can help you navigate the selling process with confidence and at your own pace.
2. Maximize your value through preparation
Weathering external economic conditions isn’t always about being prepared to react but instead about being prepared to identify and seize the right opportunity when it presents itself. At Allegiance Capital, we highly encourage business owners who have been vigilant in preparing their companies for a future sale to explore the possibility of accelerating their timeframes.
For example, under best- and worst-case scenarios for the Biden tax increases, the seller will naturally have to improve their performance and/or negotiate better than historical multiples to achieve the same levels they could have achieved if the seller closed a deal in 2021.
3. Begin with the end in mind
What’s the goal of selling your business? Is it just for a payout or is selling the business you’ve built just the beginning of something greater, such as a new phase of life?
When there is uncertainty or even unfavorable circumstances in the market, it can often feel like you’re forced into making a move. However, our advice is to stick with the evidence, as doing so will help you keep a potential buyer’s motivations and goals in mind.
How to keep your leverage during rising tax rates
Selling your business when you’ve never done it before can already feel like a daunting venture. Though capital gains rates will not change in 2024, experts are saying to expect a 5.4% increase in tax brackets.
Keeping your leverage throughout an uncertain market is all about staying aware of the economic conditions and getting prepared to make the first move. One of the most crucial ways to do this is by working with an experienced team that can help you throughout the selling process and select the right acquirer.
Free Email Course: Selling Your Business with Confidence
Join us for a 12-week, step-by-step email course to help you determine if you’re ready to sell and how to make that transition a reality.
Shane Mahmood is a managing director at Allegiance Capital, helping entrepreneurs and business owners run, scale, and (when the time’s right) sell their business. Prior to joining ACC, he served in the U.S. Army and now uses that experience to fuel his service to others both in and beyond the Dallas-Fort Worth community.