In the Next Three Months:
- Your business will decline in value by over 10%.
- Just to breakeven, you will have to grow the value by almost 12%.
- If its distributions are taxed as dividends, after-tax proceeds will decline by 33%
The tax rates implemented under the Bush Administration are due to expire at the end of 2012 and the Obamacare surtax on investment income is set to begin in 2013. Recent statements by leading Democrats imply that they will not extend the Bush tax cuts for high net worth individuals under any circumstances. The implications on rates are significant:
C Corporations that pay out dividends will see the most significant impact. However, S Corporations are not immune, particularly if the owner is thinking about selling a portion of the business to children or employees. The sale will be deemed a dividend for tax purposes (not capital gains) unless it meets certain criteria. Please consult a tax professional to determine the impact of these changes on your situation.
What Can You Do About It?
There are a number of alternatives open to privately held businesses.
- Sale – If you are thinking about getting out in the next 3 or 4 years anyway, you may want to consider selling now to ensure favorable treatment. Many buyers, particularly financial buyers, want to retain your services for that length of time anyway, so selling does not have to equal walking away.
- Recapitalization – Don't want to sell but interested in sheltering your hard earned value from increased taxes? Pay yourself that dividend now before rates go up. A recapitalization can allow you to take a significant amount of money off the table now. It can also be a valuable estate planning tool for transferring the business to children or employees.
- Transfer to Children or Employees – If you think this is the appropriate exit plan for you, now is a good time to explore at least a partial transfer.
- Buy-out Minority Shareholders – Do you have other shareholders that are not active in the business? Now may be a good time to consider buying them out. They will benefit from the advantageous capital gains treatment and you could save taxes through the deductible interest expense on the debt used to purchase their shares.
Clayton Capital Partners can assist you in meeting your goals. Time is running out! While it may already be too late to go through an auction process, we have relationships with many private equity firms that are committed to getting transactions done quickly.
If you would like to explore if one of these alternatives is appropriate for your business, please contact Craig Herron at (314) 725-9939 x 528 or firstname.lastname@example.org.
Craig M. Herron
Mr. Herron began his investment-banking career with Dean Witter Reynolds and subsequently did transaction work for Anheuser Busch International. Craig received his Master of Business Administration from the Darden School of Business and is a Chartered Financial Analyst.