Legal matters, business strategy, and life perspectives from the mind of a non-attorney.
Do you remember that sinking pit in your stomach you got after you received an exam back from the teacher and it was a bad score?
That feeling has got to be one of the worst things ever.
At least it was for me.
I’ve always been my own worst critic, so it killed me inside when I didn’t live up to the standards I set for myself.
Thankfully, my mom always knew what to say to get me back on track.
“It’s done now. Control what you can control.”
Simple, but great advice. It helped me refocus my perspective and move forward with new energy.
Talk to the teacher, do extra credit, and above all else: Bust my a** to make sure it didn’t happen again.
2018 Tax Reform
Whether you were a big proponent of the Tax Cuts and Jobs Act, or a harsh critic, my mom has some advice for you:
“It’s done now. Control what you can control.”
The bill was passed and signed. Barring something unprecedented, it will be effective for at least the next 4 years.
If you’re a small business owner nearing the end of your runway, in some respects this bill should feel more like “100% A+” territory than anything else.
1. Higher Net Cash Flows Leading to Higher Valuations
BizEquity recently published a white paper predicting trends for 2018 valuations of privately-held businesses. The spark-notes version of their findings is that valuations are expected to trend upwards, across the board, in 2018 due to positive GDP growth and tax cuts.
The overall methodology is pretty simple: The economy is doing well, so in general, businesses should make a little more money than last year. Those businesses also don’t have to pay quite as much in taxes as they did last year. These two elements result in more money on the table for the owner(s) of the business at year-end. Increasing the “bottom line” is one way to increase the value of your business. The bottom line of every business in the nation was just increased, by virtue of the 2018 tax bill.
2. Lower Taxation of Asset-Based Sales
According to wbjournal.com, more than 90% of business sales to an outside 3rd party (where the purchase price is < $10 million) are Asset-Based sales.
Asset-based sales are confusing. I won’t get into the details of how they differ from stock-based sales this time (we’ll save that for later), but this is what you need to know:
- 99% of the time, an asset-based sale requires the seller to pay ordinary income tax on some portion of the gain from sale.
- Sometimes, like in businesses that have a large amount of fixed assets, accounts receivable, or work-in-progress, the amount taxed as ordinary income is quite large.
Thanks to the new tax bill, the highest marginal rate fell from 39.7% to 37.0%.
2.7%, for many business owners, can mean tens – if not hundreds – of thousands of dollars in tax savings – if you sell your business in an asset-based sale under the current regime.
I would get into an example, but again, it’s highly complex and I don’t want to distract from the point (look for a future post on asset vs stock sale).
Bottom line: Business owners who are approaching the end of their runway just received an A+. Especially when you consider that tax rates could have easily gone the other way…
What will tax rates do in the future?
Look, I’m not here to speculate. I’m here to bring you facts. Period.
Some people like to look at the past to predict the future. If that’s you, you’ll enjoy the following chart. The blue line represents the United States’ highest marginal tax rate for each year since 1913. The orange line shows the current highest marginal tax rate.
Based on that chart, in the last 100 years (since 1918), there have only been 22 years of MORE FAVORABLE tax environments to departing business owners.
Other people like to look at the Nation’s current Debt situation as an indication of where taxes might head in the future. If that’s you, you’ll enjoy the following chart. The blue line is the same. The grey line represents Debt / GDP (an indication of our country’s ability to repay debt) for each year since 1913.
Based on that chart, it’s interesting to see that the last time our Debt / GDP trended downward was between 1946 and 1981. The average highest marginal tax rate in that time? Over 80%. Current highest rate: 37%
I don’t know what the tax situation will look like the next time someone rolls out a new tax bill.
To be honest, I don’t care.
Neither should you.
I’ll say it again: CONTROL WHAT YOU CAN CONTROL.
If you are a business owner who is approaching retirement, you were just given an A+ grade.
Now you control the situation for at least the next 4 years.
It’s time to strike while the iron is hot.
Use your time to develop an Exit Plan. Control your risks. Maximize the value of your business. And get out on favorable terms.
None of us know what the future holds, so there’s no sense wasting any more time worrying about it.
Let’s get to work.
The time to start your Exit Plan is NOW. Contact Epiphany Law to do so.
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