Proposed increase of capital gains likely to stimulate M&A activity
private equity investment
Note: Roebling Capital Partners takes no position on the outcome of the Presidential election. We provide this information solely for business owners who may be considering a sale of their business.
If the number of conversations I have had with business owners the past few days is any indication, the pace of M&A activity is going to pick up over the next few months. The anticipation of an increase in capital gains taxes under a Biden Presidency has many business owners considering if now is the right time to sell their businesses.
Proposed Capital Gains Tax Changes
Joe Biden has stated his desire to complete a tax plan overhaul which would increase business tax rates from current levels. For individuals that stand to earn in excess of $1MM, capital gains tax, specifically, would increase from its current rate of ~24% to ~39%, thereby decreasing the net proceeds an owner can expect from the sale.
In its purest form, this means that a business owner would receive 60 cents per dollar on the higher tax rate, versus 76 cents per dollar at the current tax rate. A potential net decrease in proceeds, along with the fatigue some owners are experiencing from managing business through the midst of a pandemic, has many business owners thinking now is the right time to sell.
When are business tax changes likely to occur?
If history is any indication, most Presidents aren’t able to layer in tax reform until at least the second year of their first term. Timing during this term could also be greatly impacted based on whether Republicans or Democrats maintain control of the US Senate (Georgia run-off race on January 5, 2021 will have a big implication on control or lack of control). For business owners, the window of opportunity is brief, but it is open.
Taking Advantage of the “Limited Time Offer”
It is our belief that many business owners will hasten the pace of their decision to sell if for nothing more than to take advantage of the limited time offer “sale” on M&A net proceeds (less taxes). As most deals take at least six months to close, and businesses will want to complete the transaction before any new tax law is in effect, we anticipate robust deal activity starting now and carrying into the New Year.
If you are contemplating whether now is the right time to sell (or if you are an interested business buyer), please reach out to one of us to explore options.
What else do business owners consider when deciding to sell?
Factors to consider when selling a business:
- Are the industry trends for your business currently favorable?
- Is your business ready for the scrutiny that the process of selling brings?
- Would the potential sale satiate your family’s lifestyle?
Depending on the desired outcome of selling a business – liquidity, growth, business enhancement – it can take six to 18 months or more to complete a sale. RCP can help with any type of growth scenario. Let’s get started.
Roebling Capital Partners makes controlling equity investments in lower-middle-market companies who wish to expand, grow or sell their businesses.