Lower, middle-market business owners faced a number of challenges navigating through the pandemic in 2020. Many that were in the process of selling their business had plans put on hold or deals derailed by Covid-19. With the vaccine starting to become available and the likelihood of the crisis settling down in 2021, those owners will likely attempt to restart their sale processes. For those considering a sale transaction, what does the world of mergers and acquisitions look like?

Uncertainty Surround Us

There are many uncertainties: Have valuation multiples changed? How will buyers view the business if it has not returned to pre-Covid profitability? If the business improved during Covid, will buyers assume that success will continue? While these questions are important, the most significant factor to consider in the near term is: what will happen to tax rates?

Proposed Tax Rates

With a Democratic President, House, and Senate, there is a reasonably good chance that some, if not all, of President Biden’s tax proposals will be implemented. The most important item for business owners considering a sale of their business relates to the proposed higher maximum rate on long-term capital gains. 

Under current law, the maximum Federal tax rate on capital gains is 23.8%. Under the Biden plan, net long-term gains for those with taxable income above $1 million would be taxed at ordinary rates. Biden proposes to raise the highest ordinary rate back to 39.6%. That, along with the 3.8% net investment income tax, would result in a Federal tax rate on the capital gain from the sale of a business of 43.4% (assuming the owner has gain/income over $1M). That is an 82% increase in Federal tax on the capital gain from the sale of a business. It is too early to know if this proposal will pass, and if it does, when it would become effective.

Contact Lutz M&A

Clearly, this is a critical looming issue for business owners. It seems illogical that a new administration would implement this with an economy struggling to recover from a pandemic. But we have witnessed quite a few things we didn’t think would happen in the last year or so, haven’t we! If you would like to discuss your business and these issues with Lutz M&A, please contact us.