Earlier this month I had the pleasure of participating in a presentation on “A Comprehensive Approach to Selling Your Business” with two respected colleagues: Ms. Amy Cole, a Mergers and Acquisitions Advisor with ABI, and Mr. Tim Tikalsky, a partner and CPA with RINA accountancy corporation.
One of our themes was that selling business owners must continually focus on “after tax proceeds,” and Tim Tikalsky did a terrific job of reviewing many of the factors that can make understanding “after tax proceeds” so difficult.
Most business owners expect to receive long term capital gains treatment on most of their proceeds, which in recent years typically meant being taxed at 15%. Today the tax environment is more complicated, the potential applicable tax likely higher, and the importance of tax planning even greater. A reminder of the changes effective this year, and how complicated the calculations can become, was reflected in a recent Wall Street Journal article: “The New Capital-Gains Maze” which can be found here. Some of the considerations noted are not related to a sale of a business, but many of its comments are directly on point. In addition to adding a third tax tier for capital gains at 20% to the previous two tiers of 0% and 15%, there are three “backdoor” tax increases that can push the effective tax rate to nearly 25% for some tax payers. (And Tim has also noted to me that many overlook the newly instituted 3.8% Medicare tax on investment income.) It is complicated.
At the conclusion of our recent presentation, we emphasized that, among other things, sellers should “plan early, hire a key advisory team (including an M&A advisor, and M&A attorney and a tax advisor) and never lose sight of “after tax proceeds.” This years changes of the capital gains rates, and the related tax considerations noted in the WSJ article, further emphasizes the importance of our recommendations.