The private equity market is experiencing its highest amount of activity in years
private equity investment
In June, President Biden proposed to increase the maximum capital gains tax rate from 20% to the ordinary rate of 39.6%. This change was originally proposed to be retroactively applied to April 28, 2021, however, policy experts are now postulating that the change will not be retroactive any further back than January 1st of 2022. The formal policy, pending ongoing negotiations in Congress, will likely take effect second quarter (Q2) of 2022. This gives business owners who are or may be contemplating a sale or majority recapitalization of their company a brief reprieve and some additional runway to complete a transaction before years end, to avoid the increase in capital gains taxes.
The Impact of an Increase on Business Owners
A 19.6% increase in the capital gains tax creates an entirely unwelcome scenario for business owners, who will lose millions of dollars from the sale or recapitalization of their business if the transaction occurs after December 31, 2021. For example, at the current tax rate of 20%, if a business closes a sale with gains of, say, $10 million before Dec. 31, they would pay $2 million in capital gains taxes. At the increased rate of 39.6%, that same business would pay $3.96 million in taxes – a difference of $1.96 million – if the deal closes after Dec. 31.
What Business Owners Can Do Now
The good news is that the private equity market is experiencing its highest amount of activity in years, and investors are aggressively pursuing deals. A record amount of “dry powder” –– $2 trillion – is waiting to be invested. This is as much a seller’s market for businesses as it is for homeowners today, as demand is high but inventory of available businesses for purchase is comparatively low.
Unfortunately, there is not much time left to act. Most sale processes can take 6+ months to complete, ultimately, depending on the complexity of the business. That said, some buyers are better suited to operate in an expedited fashion than others. We recommend that business owners who are interested in selling or recapitalizing reach out right away to see what their options are, and if it could be possible for a sale to be completed by the end of 2021, to avoid the potential capital gains tax increase.
Who Should Business Owners Reach Out To?
Partnering with the appropriate buyer is imperative. In some cases, it could be an individual investor or PE fund administrator like Roebling Capital Partners. We can help expedite the process and ensure a quicker-than-typical time to close due to our general lack of bureaucracy and ability to singularly focus on the transaction at-hand. With time being of the essence, neither buyers nor sellers have the luxury to move slowly. Thanks to our “all hands” approach, Roebling can help navigate this turbulent area in a professional and efficient manner and expedite the process without sacrificing thoroughness.
Our Key Differentiators:
One of the founding partners of Roebling Capital Partners, Brian Malthouse, has spent the entirety of his career helping middle-market clients navigate ever-changing tax complexities. He plays an invaluable role in developing the most tax efficient solution for our partners (sellers) by taking a bespoke, customized approach to each individual transaction.
Additional characteristics of our fund that make us uniquely suited to handle situations such as these include:
- Small, nimble, and efficient procedures, avoiding bureaucratic woes of larger funds which can prolong closings
- “All-hands” approach ensures certainty
- Emphasis on long-term value creation
- Hands-on support, as needed
- Majority recapitalization specialists
- Direct tax and operating expertise
- Optimal alignment and true partnership with sellers
Next Steps
There is no obligation to contact us to see if selling or recapitalizing is a good option for your business. We are happy to work through the scenarios with you and help you decide if now, or sometime in the future, is the right time.
Please reach out to us today.
What else do business owners consider when deciding to sell?
Owners are concerned about the valuation of the business and want to feel as if they are getting a fair deal. However, it is my personal experience that business valuation is not the main driver in agreeing to sell.
Business owners have a list of other desired outcomes. Some I have encountered are:
- Preserving jobs for those with whom they have developed deep and personal relationships;
- Maintaining a legacy that has been developed through countless hours, days, and resources;
- Providing an ‘upside’ for current leaders who have aided in building the company into its present form;
- Still feeling like they have a ‘home’ to work out of for the remainder of their careers.
A well-defined growth strategy will help companies better achieve their goals and it is never too early to consider the various scenarios.
We recommend companies consider which growth strategies can be put in place now, even months or years before a transition or sale takes place, for the best overall results.
Roebling Capital Partners makes controlling equity investments in lower-middle-market companies who wish to expand, grow or sell their businesses.
ABOUT THE AUTHOR
Keith Carlson is Co-founder and Managing Partner at Roebling Capital Partners, a lower-middle-market private equity investment firm.
CONTACT: KCarlson@RCPprivateequity.com or 859-445-2223
