There has been a lot of discussion recently about the changes coming in the Capital Gains tax.  Some of the changes are built into current law, and there is a lot of speculation that there will be more serious changes proposed when the Congress has to consider the expiration of the current rules at the end of this year.

The situation is well described by Monty Walker in his January newsletter copied here:

Federal Capital Gain Tax Rates:  Where are they headed? Since 2003, the top tax rate on most capital gains has been 15% for people in the 25% or higher tax bracket. Although a lower level tax rate has also been in place since 2003 for people in the 15% or lower tax bracket, this rate is only applicable until a person has enough income to cause him / her to enter the 25% tax bracket. As a result, for people incurring a capital gain from selling a business, most of them are in at least the 25% tax bracket so the top 15% rate is generally the rate they experience.   The current capital gain rates are scheduled to expire effective December 31, 2010 due to a time lapse built into the regulations associated with the 2003 gain reductions. This time phase-in is known as a sunset provision. Thus, starting in 2011, the top 15% rate is scheduled to revert to its former pre-May 6, 2003 level of 20%.   President Obama made a pledge to the American people that he and his administration would not raise taxes. Well, he was able to make this pledge with confidence regarding the tax on capital gains because the sunset provision was already going to cause the rate to increase.  Preview » The big question now is; Will the top rate only rise to 20% or will congress raise it higher?   Background:   For the past 30 years, the top tax rate on long-term capital gains has been below 30%.   The top tax rate on most long-term capital gains was reduced from around 35 percent to 28 percent in 1978 and was further reduced to 20 percent in 1981. It was raised to 28 percent in 1987, reduced to 20 percent again in 1997, and further reduced to 15 percent in 2003.   The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) extended the 15% rate through 2010. But, in 2011, the top long-term capital gain rate for most long-term capital gains is scheduled to revert back to the 20% rate that applied prior to the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act).   The pending tax change is well within the range of changes experienced in the last 30 years.

What to Expect   On September 25, 2009, in a letter to Representative Brian P. Bilbray (R-CA), the Congressional Budget Office (CBO) stated that when assessing the impact of the increased tax rates on economic growth, it is important to keep in mind that taxable capital gains account for a small portion of all capital income. Much capital income is paid as dividends, interest, rent, and proprietors’ profits. In addition, most capital gains are not taxable because they are held in tax-exempt accounts or are held until death. As a result, CBO does not anticipate that the pending increase in the capital gains tax rate alone will have a large enough impact on the rate of return to capital overall to change significantly the magnitude of saving and capital investment.   But the CBO did further state that higher capital gains taxes could have an additional effect by discouraging innovation and risk-taking, but there is insufficient evidence on which to base a quantitative estimate.   Congress depends on the CBO to help corroborate the financial and tax results of congressional decisions. In this case the CBO is uncertain as to the full impact to be realized by an increase in capital gain rates. This indecisiveness is exactly what Congress wants in order to support that an increase in capital gain rates will not be harmful.   Also it is important to keep in mind that with the pending Health Care Reform, people classified as wealthy will experience an additional tax levy or surtax. In the House Bill, the surtax will apply to families earning more than $350,000 a year and individuals earning more than $280,000. The surtax will start at 1 percent and rise to 5.4 percent on income exceeding $1 million. In the Senate Bill, families of more modest wealth - over $250,000 - will experience a payroll tax hike of 0.5 percent.   Take notice that the surtax in the House’s Bill of 5.4%, when combined with the Year 2011 expiration of tax cuts enacted during the Bush administration, the surtax will drive the top federal tax rate to 45%, the highest level since lawmakers rewrote the tax code in 1986. That’s right, in Year 2011, along with an increase in capital gain rates, the top federal tax rate returns to 39.6%.   As previously stated, the sunset provision on capital gains will cause the top capital gain rate to increase to 20% on January 1, 2011. When considering the financial impact resulting from the War on Terrorism and the overall increase in congressional spending, it is very likely that the issue of raising capital gain rates even higher will be introduced by some member of Congress.   Assuming a final Health Care Reform bill is submitted to the President, which it certainly appears will be happening, and likely before the end of January 2010, a person with a capital gain which causes his / her total income to be above $280,000 will already pay more that 20% because of the surtax.  So, should a person trigger a capital gain in Year 2010, such as selling a business, if at all possible?   Since most business sales include a blend of capital gain and ordinary income, when considering the known capital gain rate increase, the potential for additional capital gain increases, the pending surtax and the fact that the top federal tax rate returns to 39.6% in Year 2011, a clear answer certainly emerges.  If an entrepreneur wants to experience the lowest tax impact possible from selling his / her business, selling before the tax rates increase is the way to go. Based on current regulations, 2011 capital gain tax rates will be at least 20% with the health care surtax likely causing some people to exceed a 25% aggregate rate. If congress decides to implement further increases, anyone who waited until 2011 to sell a business will wish they could go back in time to 2010.     If you need additional information, have questions, or need assistance navigating the sea of business confusion, call your Business Transaction Strategist, Monty W. Walker at (940) 322-5086.   Sincerely, Monty W. Walker, CPA, CBI, BCB Walker Business Advisory Services

 

We now have a Certified Exit Planning Advisor, John Howe, on our team, and he is building a team with some of our other Associates to work as our Business Transition Strategies Division.  This will be a group working with a broader focus than just simple exit planning, and looking for opportunities to help across a broad spectrum of business development and value enhancement issues.

 John Howe has written the following piece to describe what that is all about and give you an understanding of the approach the new group will be taking.

 

  A good time to look ahead

 

Prepared by John H. Howe, CEPA

Over the next 15 years, the U.S. economy will see an unprecedented increase in the number of businesses for sale as baby boomer entrepreneurs begin to retire and venture out in search of their next challenge. Just as the Boomers have had an impact on everything from education to health care, the same generation will inspire an unprecedented shift in private business ownership.

The baby boomer generation has been one of the most entrepreneurial in the history of our country.  During the last 30 years over 5 million businesses with annual revenues ranging from $1 million to $75 million were founded. The owners of most of these businesses are now 52 years old or older and beginning to think about retirement. Studies by PriceWaterhouseCoopers, MassMutual and Marquette University showed that one out of two businesses will change hands between now and 2016.

The American Family Business Survey sponsored by MassMutual showed that approximately 30% of these owners plan to sell their business to a third-party buyer; another 30% plans to sell to a family member; 18% plans to sell in some manner to current employees. Others are considering transferring to a trust, while the remainder are considering closing and liquidating.

For those business owners who intend to sell to a third-party, it will become increasingly important that they position their business effectively to attract buyers in a competitive market.  Owners accustomed to calling all the shots are often not the best ones to evaluate whether their businesses are in shape for a transaction. And considering that for most owners, their business is their nest egg, it is important to seek experienced advice to maximize their return.

 

Business Transition Strategies is a division of New Hampshire Business Sales, Inc., a New Hampshire company with over three decades of experience. It can help the business owner focus on doing everything he or she can to increase the attractiveness, value, and salability of the businesses. Our team of advisors will help owners as they prepare for what could be their biggest challenge ever: life after business. We do this through a thorough exit planning process that helps owners consider the personal, business and market factors necessary for a good transition. Our engagements can be scaled to the business, and adjusted to the specific situation faced by the owner. And we will bring their businesses to market in the same confidential and thorough way used successfully through the decades. Our careful and methodical approach is not flashy, but it is effective in getting value for owners.

 

Surprisingly, the PriceWaterhouseCoopers study showed that approximately 75% of private business owners have no strategic plans in place for what to do as they approach retirement age.  An additional 25% have done little or no estate planning.  This is a recipe for disaster. 

A transition plan from Business Transition Strategies is a comprehensive, integrated review that asks and answers all of the personal, business, legal, financial, tax and estate issues that are involved in exiting from a privately owned business.  This plan shows business owners how to begin positioning themselves and their businesses so that they can accomplish their goals.

Given the number of companies coming to market, business owners will need to focus on improving profitability, developing management talent and growing revenue in order to make their companies more attractive and to maximize the proceeds they receive at the time of exit.

Transition planning delivers tangible results for savvy business owners.

Owners who commit to the process often are able to identify opportunities previously overlooked, and find significant ways to enhance the value of their companies. This can result in a higher value, and a smoother transition when the time comes for sale. It also can help identify problems that could emerge as deal-breakers at time of a transfer.

In addition, with good planning, business owners learn about tax consequences that lie ahead and adjustments they might consider to maximize retained earnings.  As any owner knows, the net earnings are more important than the gross receipts.

The most often overlooked component of transition planning, and perhaps the most important, is the peace of mind that comes when a business owner knows that he or she is being proactive and taking charge of the future, rather than waiting passively to let the future take care of itself  – after all, deciding how and when to exit a privately owned business is perhaps the single most important financial and personal decision in a business owner’s lifetime.

 

GOOD REASONS TO BEGIN TRANSITION PLANNING NOW

*  The oldest of the baby boomers was born in 1945 and is now over 64 years old.  The youngest of the baby boomers was born in 1961 and is now 48.

*  By 2010 the number of business owners wanting to sell their businesses each year will have increased fivefold over 2004.  This trend will continue for the next 10-15 years.

*  While the oldest boomers may be ready for retirement, the companies they exit are viewed as desirable “new opportunities” for younger boomers seeking work independence. The youngest members of this generation are active buyers. They are very entrepreneurial, and are eager to take charge of their careers.

*  The economy has been through an historic disruption, but the picture is improving and there is pent up demand.

*  It can take as little as 6 months and as long as 36 months to get positioned for a transaction.

*  We are currently experiencing some of the lowest capital gains tax rates in decades. But how long will this tax climate last?

There is another reality to consider.

What would happen if you were unable to continue in your current role?

We have seen this tragic development recently when owners figured they would always have time “tomorrow” to think things through, but were wrong, and others ended up saddled with doing it for them. Consider the potential burden you would leave on your family and employees as they struggle to piece together an action plan without you in the picture. Often they lack the resources and skills to do this.

To get started on the transition planning process, get informed. Seek information from the best independent and objective sources possible. One good place to start is to talk with trusted advisors like your attorney, accountant, financial advisor, or insurance professional or an investment banker who focuses on privately held businesses. And remember to work with us; we try to think of the entire picture, not just one piece of it.

Business Transition Strategies is ready to help. We collaborate with other experts, such as the one who gave this article to you, to make sure you get the thorough advice you deserve. Call us today for a confidential evaluation.

>John Howe, CEPA, is credentialed through the Exit Planning Institute of Chicago. He has run businesses on his own, and served for over 30 years as general manager for a family owned company. He knows the special challenges faced by owners. He works as part of a team of business advisors and transaction specialists who work with him in Business Transition Strategies, a division of New Hampshire Business Sales, which has an exceptional record of effectively working with business owners for nearly four decades. A confidential diagnostic can be performed to evaluate your readiness. It will help determined what is needed for an effective transition. We can be contacted through the offices of New Hampshire Business Sales in Portsmouth, Meredith and Henniker, 603-279-5561, and affiliated offices in Portland, Maine and Vermont. Inquiries can be made in complete confidence to jhowe@nhbizsales.com, or NHBS@nhbizsales.com

If you think you want to buy a business it is important that you figure out how to go about it.

A  good source of information is the International Business Brokers Association (IBBA) web site, particularly the article at:

http://www.ibba.org/Buyers/BuyingProcess/tabid/265/Default.aspx

We are members of the IBBA and several of us are Certified Business Intermediaries.  The CBI designation means we have studied our trade and passed a rigorous examination to meet the standards for the professional certification of the Association.   There is more information about the CBI program and designation on the Association site.

Invest in Your Future, Become a Small Business Owner! OR, as an owner, perhaps you’re thinking of selling. We can assist you in developing an exit strategy.

Attend our seminar and learn how businesses are analyzed, valued, marketed, and how sales are negotiated and financed. These seminars are being held at various venues around the state. We’ve already have several which have been well received. The next one is scheduled for October 8th at the EF Lane Hotel in Keene from 6-8PM. The last seminar of 2009 will be on October 29 at Franklin Savings Bank in Franklin from 6-8PM. Seminar is at no cost, but advance reservations are requested. To register, or for more information, contact us at 603-279-5561 or by e-mail at nhbs@nhbizsales.com .

After my note to my Associates yesterday about it being the time to act now one of them, John Howe, wrote the following:

 

“Are you open to opportunity?

 

This is a great time to get going on your business dreams, particularly if they involve living in New Hampshire.

 

Our company president Leon Parker issued a memo with several excellent reasons why buyers should act now.

 

Opportunities come and go. Some see them and act on them. Others, ignore or miss them. Visible to you or not, the chance to be successful is there.

 

A few years ago a business man drove along a barren stretch of highway in Tilton, N.H. Off on the side was a little For Sale sign. Across the road was a large line of paving equipment vehicles. Ahead was a simple highway interchange.

 

Long story shortened, the end result was the first of what would become one of many developments that has turned the Exit 20 area of Interstate 93 into one of the busiest retail and business centers in New Hampshire. I have been told that a gasoline station operated by a large chain in that area consistently reports some of the biggest daily sales in the state from that location.

 

Someone saw an opportunity, not just open land.

 

Several recent news developments add fuel to the notion that now is a good time for business, and that New Hampshire is a great place to be. One is the fact New Hampshire remains among the top ten for business tax climates in the nation. The other is the fact housing costs in New Hampshire remain affordable compared to other New England states.

 

Keep your eyes open. Check out our listings and think what you could do if you were in charge.”

 

 

 

Our Associates are located all over the state (and Maine and Vermont).  Here is a copy of a message I just Emailed to them:

“I was visiting a local banker this week.  He asked me, “When are you going to bring me some good deals to finance?”   I realized this was third banker in as many weeks who asked me the same question.    With the banks saying “bring ‘em on” and the economy on the upswing, could there be a better time to buy a business?  Consider:

ü  Interest rates are as low as you are apt to see them for a long time.

ü  The SBA guarantee fees, which can be substantial, are being waived until the end of the year.

üBusinesses that survived the downturn are the ones you want.

ü  Prices are low but will be rising as the economy improves.

Give this message to all your customers - Want a business with good cash flow?  Here is a partial list of our businesses for sale that have Seller Discretionary Earnings (SDE) of more than $100,000: Ø  North Country feed store, $475,000:  SDE $107,000

Ø  Southern NH auto repair/lube shop, $300,000:  SDE $140,000 Ø  7-11 store, $458,000:  SDE $131,000

Ø  Seacoast c-store, $850,000 including real estate:  SDE $106,000

Ø  Lakes Region inn, $575,000 including real estate:  SDE $116,000

Ø  Southern NH c-store, $949,000 including real estate:  SDE $187,000

Ø  Mass border c-store, $1,375,000 including real estate:  SDE $284,000   My message: “It’s time to act!”  Tell customers to look at all the businesses we have for sale at www.nhbizsales.com. Sincerely,Leon Parker, CBIPrincipal Broker”

§  Happiness is owning a business
A new Gallup-Healthways Well-Being Index rates business owners as the happiest workers in America, followed by professionals and executives. Well-being is measured by how respondents answered questions about how they feel about such things as their work environment, physical health, emotional satisfaction, and access to food, shelter and health care. Google/The Associated Press (9/22)

By New Hampshire Business Sales Inc. Associate John Howe

 

Sometimes it is good to be small.

 

This can be true for business as well, especially as the economy shows signs of improving. Though the big companies deal in larger sums of money and have economies of scale on their side, smaller firms can react more quickly and ramp up more appropriately to take advantage of shifts in the marketplace.

 

Many larger companies are trying to overhaul their cultures so they can be more nimble. But they are like cargo ships, where it takes a long time for instructions from the wheelhouse to result in a change of direction.

 

The trick for smaller companies is to find ways to preserve core elements that make their operations successful while being responsive to the needs of customers. They are like powerboats where it takes less effort to adjust direction slightly while still staying on course.

 

Business giant Wal-Mart has recently launched a new effort away from the cookie cutter approach to adjust stores to local tastes and needs. They are working to be more responsive. They are learning that sometimes the best ideas don’t flow from Bentonville.

 

Small business should keep this in mind. Being nimble and responsive to customer needs is a path to survival.

 

An example can be found in a local chain grocery store that offered a handful of pre-made sandwiches. They are quick to pick up, but lack the satisfaction available from the independent sandwich shop down the street that provides a choice of breads, options in meats and wide range of vegetables as toppings. And they can fill your order in minutes.

 

Which approach do you prefer?

 

The cause of being nimble is a strategic advantage small business owners should capitalize on. Rather than trying to match the big box stores, they can cater their inventory and services to their core market.

 

We recently sat at a busy intersection with four lanes of traffic.

 

Running through the maze of truck tires and speeding traffic was a small squirrel. It darted back and forth, reacting quickly to the movement on the highway. Against all odds, it made the crossing safely and went on with its search for food.

 

Being small and nimble has its advantages.

 

 

 

As we go thru the second half of the summer, when things are usually pretty slow in our business because it is vacation season, we are pleased with the level of activity we are experiencing.

Customer traffic has picked up.  Sellers are calling to consider listing their businesses for sale, and bankers are courting us again to bring them deals.

If you have been thinking of buying a business, and have some cash to use for a down payment, take a look at the listings on our web site.  Be aware that a lot of the prices on businesses for sale have come down because of the slow last year in most of them.  Also be aware that bankers are going to take a hard look at the deal and will be conservative in what they will finance.

In a lot of cases seller financing assistance is required and sellers are understanding that.

There has been a lot of publicity lately about Small Business Administration loan guarantee programs.  The best news is that they are covering their own financing fees right now, leading to very significant savings in closing fees for loans they guarantee.

In previous Blogs I have mentioned, and sometimes copied, Richard Parker of Diomo Corporation.  This time he hit such a home run in his piece giving advice to customers who want to be buyers that I could not resist copying it for anyone who reads us but who has not been following him.   The following was published in the latest BizQuest newsletter, which you can get by subscribing at BizQuest.com.

“Common Mistakes When Buying A Business

Sometimes I have to just shake my head when it comes to how people approach buying a business. Here are some of the common issues that buyers table and I want to use today’s forum to get a few things straight for you: Don’t expect the seller to hand over a binder of confidential documents - Of course any buyers want to have access to as much financial documentation as possible so they can effectively value the business. However, sellers will often disseminate this information in stages, as the buyer demonstrates their qualifications and level of interest in the business. It makes no sense whatsoever to barge into the first meeting with the seller expecting a portfolio of documentation or request detailed financials at first contact with the broker.  

Sign the non-disclosures right away - When you contact the seller the first time, do not request any information. In fact, it is just the opposite; it is the buyer who should be offering to provide information to the selling party, and specifically a non-disclosure form. As such, in your first contact, simply express interest, and request the appropriate documents for you to execute in order to get additional information. You know the old adage about first impressions….if you come across as an amateur, you probably will never hear back from the seller.  The first meeting is like a first date - While you absolutely need to be prepared with all of your questions for the first meeting with the seller, it is best to keep the meeting conversational. You want to engage in a dialogue with the seller, and to learn more about their business. If you sense they are apprehensive in answering any questions, just move on to the next one. Your goal in the first meeting is to get a good sense about the business, can you see yourself running it, do you like/trust the seller. You want to leave with enough data to conduct your research, and don’t worry; you will have ample time to get all your questions answered, regardless of whether or not the seller/broker pushes for an offer. 

Impress the seller but don’t boast - It is amazing how a buyer can negotiate better deal terms when they impress the seller. After all, there is no way any seller will provide financing if they believe you are incapable of running the business. Do not try to show the seller how smart you are; show them how capable you are. Outline your past accomplishments and be honest about your strengths and weaknesses. As you learn more about the business you can provide feedback and questions about certain initiatives you would like to consider and ask more pointed questions about the past a strategies the seller has implemented. Don’t lie - I know this sounds obvious but you cannot even imagine how many buyers go through with contacting brokers, meeting sellers and completely embellish their story. This mostly happens when they’re asked how they are going to finance the deal. If you do not have financing lined up, and you are expecting the seller to finance the deal, and especially if you have limited resources for a down payment, then be upfront about it. Don’t waste anyone’s time, and certainly your own. Yes indeed there are some incredible deals in the market now, but you have to be realistic as well about what you can afford. 

You cannot buy a business from an ad - The listings you see online are teasers. They will provide you with some basic information about the business. These advertisements strictly provide the buyer with a general overview of the business and when you find one of interest, send in an inquiry. You can spend endless hours searching endless listings. That is not how you buy a business; that is how you “look” for a business. If you want to be a buyer, you have to start the buying process and that means contacting sellers, meeting with them, and conducting your research. If you sit in front of your computer and click from one ad to the next hoping that your ideal business is a click away, you are going to spend a ton of time and get no results. Get into the hunt and get out there and meet sellers…lots of them….it is undoubtedly the best strategy to become a buyer and not a looker.  And the single most frequent comment I get from buyers is - ”Should I buy a business in this economy?” And my answer is always the same: ”I have no idea.” But, I will tell you that it is a tremendous time to do so because you can put together a better deal today than at any other time in the twenty years I have been involved in the business of buying businesses. We have written an excellent report on this subject which you need to read because there are specific deal terms you must follow given today’s uncertain times. You can access the report at: http://www.diomo.com/tips.html  Have a great week.”The author of this piece, Richard Parker, has been helping small business buyers for nearly twenty years. To learn more about Richard and to read some other great articles on the subject buying a business, visit www.diomo.com.