OK —- On at least three occasions over the past year I have tried to emphasize the fact that in your strategic planning a seller needs to consider future tax implications. If anyone had a doubt that from day one the current Administration has had their eyes on your pocketbook – well something like “head and sand” comes to mind.
In doing a deal, as in selling your company, sellers always go through the age old process of spending the money before it shows up. For independent and smaller transactions I often hear phrases like “Pay off the mortgage, money for the College fund and fund my retirement” or “Pay off my debt” or “Cash to start my new endeavor”.
This is usually coupled with my estimates of current valuations where I say something like “1.0 to 1.25X annual revenues or higher” (For example only! I am not even concerned about what type of deal did you hear “example”?!!) —- but that is the range. What is heard is always that phrase “possibly higher”. What ever caveats or disclaimers I am screaming, as I throw out additional exclamation points in the background those words “possible higher” ring loud. People always hear the high end – not the possible low reality. It is only natural.
Oh yes taxes. Well the rules just changed. So lets just give you a couple of examples.
Yesterday:
- You sold your company for taxable gain of $5,000,000 in a stock transaction. Your long term capital gain tax was 15% – or $750,000 —- you kept $4,250,000 (prior to transaction costs local and state taxes). Lets call it enough money to satisfy your goals.
Today: Same deal $5,000,000 gain…. The Healthcare Bill was signed a couple of hours ago and the rules changed:
- 15% LTCG, 2.3% Medicare on the LTCG plus another 3.8% Medicare “Hey I make over $250,000/yr” hit… total 21.1% —- Your tax bite is now $1,055,000. You keep $3,945,000. Less than enough to satisfy your goals.
Now procrastinate until January 1, 2011 (282 days from this writing).
- Bush tax cuts expire – your total exposure jumps another 5% and is now 26.1% – Tax bite $1,305,000 you keep $3,695,000 — You already figured the “less satisfaction” diatribe.
Now all this is mute if the reconciliation bill does not pass or is changed but I wanted to give you each one of those 282 days.
In closing you may ask: “Possibly the buyer will kick in more?” Well that is why I really try to work on the high end.
Later Tom – Or Meet me in NYC at the WHIR Networking Event Thurs March 25th.
More about Tom: NCC – the Hosting Business Broker Twitter: TomNCC and NCC WebHostBusiness
About Tom Millitzer
I am an M&A guy. I sell Hosting Companies. I want you to fulfill your dreams. If you are building your company or exiting for success...I want help you grow rich.
I started NCC International in 1994, we represented our first hosting company in 1997. NCC has completed over 400 assignments. If you are considering buying or selling you need to know me. I do not bite.
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