Wealth Management

Selling Your Business Before Taxes Rise

By Daniel B. Eagan June 01, 2012

Planning to sell your business? Try to wrap up the deal before year end, when today’s highly favorable US capital gains tax rate is scheduled to expire.

The federal long-term capital gains tax rate now tops off at 15%. If Congress does not act, on January 1, 2013, it will shoot up to 23.8%, including a 3.8% healthcare surcharge for individuals with incomes over $200,000.

How much difference could that make? Let’s say you’ve received an offer of $50 million for your business. Selling it this year and paying 3% in transaction costs would leave you with $41.2 million and the US Treasury with $7.3 million (assuming you live in a state without its own capital gains tax). The same transaction in 2013 would net you only $37.0 million, with $11.5 million ($4.2 million more) going to the government.

Invested wisely, the initial difference between the net proceeds of selling in 2012 and 2013 could widen dramatically over time. We estimate that if you sell in 2012, invest the money in a portfolio with a moderate asset allocation of 40% stocks and 60% bonds, and spend $750,000 a year, the median value of the portfolio’s potential value after 30 years would be $84.9 million. It would be $68.2 million if you sell in 2013. In other words, the initial difference in proceeds due to taxes would nearly quadruple to $16.7 million.

The difference would likely become even more extreme after 40 years. With the same spending and investment assumptions, a 2012 sale would leave median wealth of $112.7 billion to pass on to family and charity; a 2013 sale would leave median wealth of $83.6 million, or $29.1 million less. In making these calculations, we project a range of plausible outcomes. As illustrated in the display below, there’s a 80% chance that a sale in 2012 will leave you with wealth between $30.3 million and $315.9 million in 2052.

Estimating the Impact on Estate Values of Selling in 2012 vs. 2013 If you delay until 2013, you could try to offset the impact of higher tax rates by seeking a higher price for the business. But you’d have to raise the selling price to $55.8 million—nearly 12% above the offer on the table in 2012. Is it likely that your company can increase its earnings to that extent, or that you’ll be able to find a buyer willing to pay a multiple that much higher?

No one can know with certainty how the capital gains tax rate will change in 2013. But if you see a strong likelihood of a higher rate and you have a deal in the works, this might be the right year to complete it.

The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation. 

Selling Your Business Before Taxes Rise
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