Portland Business Broker Thoughts

Depending on which study you look at, the average marketing time for a small closely held business is 7-10 months.  In other words, if you have an average business, in an average economy, then, on average, you would need to begin marketing it somewhere between today (March 1st) and May 31st in order to have it sell by December 31, 2010 if the process and buyer interest level was average.

So, why is this important?  Because if your business sale closing occurs in 2011 instead of 2010 you will likely pay far more in taxes.  There are two reasons:  1, the Bush tax cuts expire in 2011; and 2, the current Obama healthcare proposal contains a significant new tax on capital gains.

The Bush tax cuts expiring at the end of 2010 will mean that capital gains tax rates will increase from 15% to 20% (a 33% increase!), and ordinary individual income tax rates will increase from 10, 15, 25, 28, 33, and 35 percent to 15, 28, 31, 36, and 39.6.

Last week Barack Obama came out with his new healthcare proposal.  There is sufficient reason to believe that this healthcare proposal has a high probability of passing through use of a 51% majority reconciliation process.  In the President’s plan he calls for a new 2.9% Medicare income tax assessment on passive income for individuals making more than $200,000 and families making more than $250,000.  See Bloomberg’s “Obama Endorses Medicare Tax, More Drugmaker Fees.“

So, let’s see how this would impact your federal tax obligation if you were anticipating selling a business and it closed in 2010 compared to it closing in 2011 assuming the healthcare plan, as currently proposed, is passed, and there isn’t an extension of the Bush tax cuts.  Let’s assume that the business has cash flow of $500,000 for 2010 and that under Scenario 1 it closes on December 28, 2010 for a price of $2.7 million, of which $2.3 million is capital gains and $400k is ordinary income.  Since you already earned enough during the year to cause additional income to fall in the highest tax bracket, the capital gains tax will be 15% and the ordinary income tax rate will be 35%.  So, an estimate of what you would pay in taxes on the business sale would be $485,000 ($345,000 in capital gains tax, and $140,000 in ordinary income tax) – in a vacuum of course – since other personal issues could impact your taxable income.  In other words, you would likely be left with about $2,215,000 (this is simplistic for illustration – I have not included business broker commissions or closing costs since these will vary, and may lower taxable income).

In Scenario 2, let’s assume all of the above but that the closing occurred on Jun 30, 2011 and that the Bush tax cuts weren’t extended and that a healthcare bill was signed that results in a 2.9% medicare tax increase on capital gains and passive income.  In this scenario total taxes due would be $685,100 ($526,700 capital gains tax, and $158,400 ordinary income tax).  So, after taxes you would likely be left with about $2,014,900.

In the above example, someone selling in 2010 instead of 2011 would end up with about $200,000 more cash.

Consequently, if you want to increase the probability of selling your business in 2010 I would strongly encourage you to contact Codiligent business brokers to discuss the business sale process and determine if it makes sense to move forward at this time.  We are quickly approaching a time when the probability of getting a deal completed in 2010 will be low.