Although there is prior evidence of similar usage, the famous quote “in this world nothing can be said to be certain, except death and taxes” is famously attributed to Benjamin Franklin in a letter addressed to Jean-Baptiste Leroy in 1789 commenting about the durability of the new American Constitution.
As a result of recent legislation, we now have several changes to our ponderous tax code, and I have already been asked by more than one of our clients how this might impact them and the potential sale of their business.
With the understanding that I am not an accountant and each situation needs to be scrutinized by an experienced tax advisor familiar with the intricacies of both the business and the personal tax situation, and that experts a lot smarter than me are still trying to work through the implications and nuances of the new legislation, my view from ten thousand feet indicates to me that the new tax law is generally favorable to the business transfer market.
Starting with the Golden Rule (“He or she who has the gold, makes the rules”), both from a corporate standpoint and an individual standpoint, taxes will be lower, which means that more money can be retained in the business for investment and growth. Theoretically, all other things being equal, the business should be more attractive to buyers, which may translate to a larger purchase price and better terms to the Seller. Even if the price and terms don’t change for the Seller, the lower tax rates should translate to a larger net retainage, after taxes, for the Seller. We will keep you advised when we come across appropriate information about this topic.
Most of the conversation about taxes has focused on the new tax legislation, which is understandable, but many of us still need to report 2017 results under the prior tax code. If you are selling your business in 2018, the financial results of the most recent year-end (2017 for the majority of business owners) will be one of the largest drivers of value, and it is important to close out 2017 in a manner that will maximize value.
In most cases, it is not too late to meet with your accountant and reclassify some personal items that were expensed through the business as distributions. Although this will result in taxes that may be somewhat higher, the results can be meaningful.
For example, earlier today, one of my team members was on the phone with a prospective buyer for a business that we are representing. In our opinion, this is a good buyer that is financially qualified and has industry experience. As a result of the Seller being somewhat aggressive with expenses, the buyer lowered his offer by 25 percent of the asking price. Although we are working to bridge that valuation gap, the outcome may ultimately have a negative impact on the value that our client realizes, as a result of the aggressive tax positions taken by our client.
The majority of our business is derived from referrals. Please consider referring our services if you encounter a situation involving the potential purchase or sale of a business.
The FBB Group, Ltd. team wishes you and yours a healthy and prosperous 2018
Ronald V. Chernak
Inspiring business relationships since 1982!
(originally posted in the January 2018 newsletter)