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Posted - Jan 3,2012 Why 2012 May be the Best Year to Sell Your Business
Article Published January 3, 2012 — North Bay Business Journal
Historically, business transactions escalate when taxes are expected to change, as sellers and buyers try to capitalize on favorable rates. It is safe to assume that the
Capital Gains Tax Rate Increase
Given our massive federal budget deficit, most experts believe that the Bush tax cuts will not be extended again at the end of 2012. The current maximum Federal long-term capital gains income tax rate is 15%. The top long-term capital gains tax rate is expected to revert to the pre Bush tax cuts rate of 20% on January 1, 2013. The 20% rate was effective from 1997 to 2003, and some expect it to could go even higher. Note that from 1987 to 1997 the maximum capital gains tax rate was 28%.
Ordinary Income Tax Rate Increase
The current top individual ordinary income tax rate is 35%. This rate applies through 2012 due to the Bush tax cut extension. Again, expectations are that the Bush tax cuts will not be extended beyond 2012. What will the new maximum tax rate be? Consider our tax rate history:
|
Period |
Top Tax Rates |
|
1944 to 1963 |
82% to 94% |
|
1964 to 1982 |
69% to 77% |
|
1982 to 1986 |
50% |
|
1986 to 1992 |
31% to 38.5% |
|
1993 to 2002 |
38.6% to 39.6% |
|
2003 to 2012 |
35% |
Special 15% Qualified Dividend Tax Rate may be Eliminated
The qualified dividend maximum tax rate remains at 15% through the end of 2012. Before the Bush tax cuts, dividends were taxed at ordinary income tax rates. C corporation business owners could be faced with a 100% or more increase in this tax if they don't distribute dividends before the end of 2012.
Patient Protection Act
Starting in 2013, there is an additional 3.8% Medicare tax for individuals with adjusted gross income (AGI) above $200,000, joint filers with AGI above $250,000 and married taxpayers filing separate with AGI above $125,000. This tax is generally levied on interest, dividends, annuities, royalties, rents and capital gains.
Also beginning in 2013, the Patient Protection Act imposes a 0.9% additional Medicare tax on earned income in excess of $200,000 for individuals, $250,000 for joint returns and $125,000 for married taxpayers filing separate.
Section 179 Deductions
Decreases in Section 179 deduction limits from $500,000 in 2011 to $25,000 in 2013 and the elimination of bonus depreciation in 2013 will result in higher taxes as well as lower business valuations from buyers. Businesses with recurring capital equipment needs will be especially hard hit.
Cumulative Effect
Business owners who are approaching retirement are encouraged to consult with their tax advisor immediately to understand what the cumulative tax effect will be if they exit in 2012, set against waiting another year or two. The savings could be substantial. Because tax practitioners are so inundated at tax time, these exit planning conversations often don’t happen. Be proactive here to maximize proceeds and avoid surprises.
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Al Statz, CBA, CBI, is President of Exit Strategies Group, Inc., a business brokerage, merger, acquisition and valuation firm serving private businesses in
The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper that covers the North Bay area of San Francisco – from the Golden Gate bridge north, including Marin, Sonoma and Napa Counties.
Posted - Dec 30,2011 2012 Sonoma County Backgroad Challenge Announced
Yes, this is a business blog, but you should know about the annual Sonoma County Backroad Challenge on May 19, 2012 in Petaluma. Cyclists of all levels can enjoy spectacular Sonoma County backroad scenery on one of three fully-supported rides (100 miles, 100 Km and 50 Km) ranging from leisurely to grueling. The Backroad Fest at Lagunitas Bewery will be in full swing when you return from your ride. Enjoy local cuisine, cold brews, live music, fun and fellowship until 6:00 pm. Register at www.backroadchallenge.com. Limited to 999 riders.
Tell your rider colleagues, friends, neighbors and relatives. Our website includes a primer on organizing a team of riders for your company or group.
This event is a fundraiser for the Petaluma Sunrise Rotary Foundation and all proceeds support our club's charitable projects. What's Rotary? Rotary club members volunteer locally and internationally to combat hunger, eradicate polio, improve health and sanitation, provide education and job training, and promote goodwill and peace.
Posted - Oct 19,2011 What Lenders Want
In ten years of selling private businesses, financial leverage has consistently been one of the key success factors in expanding the pool of buyers and closing deals. Fortunately for business owners, the SBA loan guaranty program is an excellent funding source for deals up to $5MM. And, lenders are lending now. A lender analyzes both the buyer (borrower) and the business being purchased. Here are 10 things lenders look for when evaluating a loan request for a small business sale/acquisition:
1. Down Payment. Lenders want a buyer to inject 15%-25% of the total project in cash, depending on several factors including whether real estate is included in the sale. Common down payment sources are retained earnings, savings, retirement plan funds and gifts from family members. Your cash injection cannot be borrowed.
2. Creditworthiness. Lenders investigate a buyer’s credit at the outset of the approval process. A bankruptcy, foreclosure or judgment usually nullifies their chances, no matter how good other criteria look. Remove blemishes from your credit history before you apply.
3. Track Record. Individual buyers must have experience in the type of business and/or industry they are buying into. Lenders look for management experience, and they prefer to see prior business ownership. Tailor your resume to highlight your management and applicable industry experience.
4. Cash Flow is King. Business cash flows must service the loan and provide adequate income for the owners. Lenders analyze the historical tax returns of the business—allowing reasonable adjustments for owner perquisites and non-recurring costs. The quality of financial records comes into play here. Your business plan also comes into play. Synergistic benefits, increases in working capital and capital expenditure needs are considered in the cash flow calculation.
5. Collateral. Buyers with real property to pledge as collateral may compensate for weaknesses in debt service coverage, business assets, experience, credit, or liquidity. Generally, if you have equity in real property, the SBA requires that it be used to secure your business acquisition loan.
6. Positive Trend. Nothing scares lenders more than negative sales and earnings trends in a business or its industry. Conversely, a pronounced positive trend is a thing of beauty to a lender. They often look back several years to see how the business performed through past economic cycles.
7. Business Plan. Buyers have to submit a basic business plan for the business they are acquiring. Lenders want to see an intimate understanding of the business and industry. In most cases a plan calling for modest growth and incremental change is your safest bet.
8. Continuity. Commitments by existing managers, key personnel, suppliers and customers to continue with the new owner represents reduced risk to a lender.
9. Seller Training. Lenders want to see a well thought-out management transition plan. The training/transition period can be anywhere from 1-12 months, depending on circumstances. Be sure you negotiate this point up front and clearly spell it out in the purchase agreement.
10. Seller Financing. When a seller finances even 10-15% of a deal, subordinated to the bank note, it shows the lender that the seller is confident in the business under the buyer’s leadership. This deal point is commonly imposed by lenders.
Finally, for loans over $350,000, or whenever a buyer and seller have a close (non-arm’s length) relationship, SBA lenders require a fair market value appraisal from an accredited business appraiser to validate the borrower’s purchase price. The deal can’t exceed the appraised value. Sellers are advised to prepare months or years in advance, to increase their odds of cashing out when they are ready to exit. Ask yourself, does my business qualify?
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Al Statz, CBA, CBI, is President of Exit Strategies Group, Inc., a business brokerage, merger, acquisition and valuation firm serving owners of closely-held businesses in Northern California. He can be reached at 707-778-2040 or alstatz@exitstrategiesgroup.com.
The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which covers the North Bay area of San Francisco – from the Golden Gate bridge north, including Marin and the wine country of Sonoma and Napa counties.
Posted - Oct 4,2011 October 27th "Maximize the Value of Your Business" Seminar Announced
Exit Strategies announces the next in its series of executive briefings for business owners. At this candid, fast-paced workshop, business owners will learn …
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Valuation basics & 20 ways to build enterprise value
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Preparing a successful exit strategy
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Market conditions and trends
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Tax advantages of selling in the next 15 months
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Steps in a successful M&A sale process
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Answers to common questions
When: Thursday, October 27th, 5:00 to 7:30 pm
Where: Petaluma, California
Cost: Free of charge to private business owners
Presenters: Al Statz, President, Exit Strategies Group, Inc., and David Fisher CPA
Registration Required: Call 707-778-2040, or Email info@exitstrategiesgroup.com. Space is limited. We will confirm attendance.
This is essential information for private business owners who intend to sell in the next 3-5 years. It is never too early to plan ahead to achieve the successful exit that you, your family and partners deserve, and avoid unnecessary surprises.
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Exit Strategies' executive briefings are free or nearly free workshops on essential topics for private business owners. These topics originate from years spent guiding clients through successful exits, mergers and acquisitions. The sessions are presented by our knowledgeable staff and subject matter experts within our professional network, in a private, small group setting. For confidentiality, we strictly limit attendance to one business owner per business type and pre-register all participants.
Posted - Sep 10,2011 Valuations for SBA Business Acquisition Loans
Determining the value of a business is a key aspect of an SBA lender's underwriting process for loan applications involving a business acquisition (change of ownership).
According to SBA Standard Oprating Procedure 50-10-5(c), paragragh (i), page 179, for all business acquisition loans over $350,000, or whenever a buyer and seller have a close relationship, the lender must obtain an independent business valuation from a qualified source. Examples of "close relationships" include transactions between: Employer-Employee; Family members; Co-Owners; and any parties that have an existing, non-arms-length relationship. A "qualified source" is an individual who regularly receives compensation for business valuations and is accredited by a recognized organization.
As Certified Business Appraiser's (CBA's) accredited through the Institute of Business Appraisers, Exit Strategies Group, Inc., is a qualified source for business appraisals for SBA loans.
Exit Strategies provides quality, SBA- and USPAP-compliant valuation reports within 2 weeks, at a competitive cost.
Lenders may call Bob Altieri, CBA, at 530-478-9790 to request a quote or receive a sample SBA loan valuation report.
Posted - Jul 26,2011 Exit Strategies Joins National Business Valuation Group
Exit Strategies has joined forces with National Business Valuation Group, LLC, a consortium of independent business valuation and litigation support firms that have affiliated in order to provide clients with highest quality professional expertise. The relationship between offices allows each firm to provide its clients with technical, database, industry, geographic and consulting expertise that would not be available from typical business valuation firms. Offices regularly communicate with each other regarding specific cases and valuation issues in order to ensure the highest quality work for clients.
Each office in the group is required to have senior level business appraisers with either Certified Business Appraiser (CBA) or Accredited Senior Appraiser (ASA) professional designations, the most coveted and difficult professional designations to obtain.
