The 24-Month Window Of Opportunity
As you are aware, President Obama signed into law on December 17, 2010 The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This Act has very favorable income tax and wealth transfer tax provisions, including a reduced maximum estate tax rate of 35% (from 55%) and a five-fold increase in the lifetime gift tax exclusion from $1 million ($2 million per couple) to $5 million per person ($10 million per couple) in 2011 and 2012. Without further Congressional action, on January 1, 2013, the 2010 Act will return the federal, state, and government sales tax rates and exemptions to pre-2001 laws, which include tax rates up to 55% and exemption amounts of $1 million per person ($2 million per couple). While some argue that the extension of these tax cuts have been achieved, in part, as a result of political gamesmanship, the extension will benefit both individuals and businesses.
Additionally, in the early part of 2010, many expected the Bush era tax cuts would expire at the end of the year. This expectation created a sense of urgency and precipitated a significant rush of deal-making late in the year. However, a number of businesses were not ready – or not properly positioned – to sell by the end of last year.
The unexpected two-year extension of the Bush era tax cuts combined with the signing of the Tax Relief Act of 2010 has provided business owners with a renewed opportunity to take advantage of very low tax rates. Given the size of our federal deficit and the cost of the fiscal stimulus programs that have been put in place, it is likely that in 2013 we will be facing a materially higher tax environment. Thus, for business owners whose company values are within range of their exit objectives, the next two years provides a truly unique opportunity to complete a deal.
Since becoming a private equity investor nearly 13 years ago, I have met with numerous CEOs who are interested in selling their business and the first question I always ask is why. The answers (all 100% legitimate) can include: “seeking a strategic partner to source acquisitions, fund capital investments or recruit human resource talent”, “the desire to eliminate personal guaranties on indebtedness”, “an interest transitioning out of the business”, “the need for liquidity or growth capital” as well as a host of other reasons. (Side note: One of the most memorable answers to this question I ever heard was from a seller of a micro-cap public company who shared with me and my partner he was desirous of realizing some liquidity so he could buy a sailboat and sail around the Caribbean. It wasn’t until 2 hours later he shared with us that he was a convicted felon charged with smuggling drugs into America…needless to say, we took a pass on this opportunity). Frankly, the answer is simple, economics. 90% of a business owners’ net worth is tied up in the stock of their company and, therefore, one of the most common reasons for selling one’s business is for diversification and estate planning purposes. My theory why “estate planning” doesn’t often get mentioned as the reason behind selling one’s company is because people don’t enjoy discussing their own mortality. However, a private business owner, should seriously consider using this window of opportunity to transfer up to $10 million dollars to their children or grandchildren and do so with a distinct financial advantage.
MCM Capital, a private equity firm based in Cleveland, has a 20-year history of completing transactions with owners of private companies and estate planning has always been at least one driving factor in the desire to sell their business. MCM offers to work closely with a seller’s counsel to structure the transaction in the most tax-efficient fashion and to help facilitate any estate planning needs of the seller.
Whether you are desirous of selling 100% of your business and ready to move on from the daily grind or you are interested in realizing liquidity but remain an involved shareholder in your company, MCM would be happy to discuss with you various transactions structures that could accomplish your objectives. In light of today’s favorable tax climate, which will likely come to an end in 20 months, I can not think of a better time to explore the sale of your business.
MCM Capital Partners is a micro-cap private equity fund investing in niche manufacturers, value added distributors and specialty service businesses. For more information on our private equity firm and investment principles, contact us today.