As a company actively engaged in acquiring niche insurance underwriting and distribution companies like MGAs and Program Administrators, one of the first questions a potential seller asks is, “Why should I consider selling now, versus waiting a few more years when my business is bigger?” There are, of course, a multitude of answers to this question, but most include the term “may or may not.”
A few examples:
- General economic conditions may or may not contribute to growth and additional value of the business
- New products or programs may or may not take root, increasing the value of the business
- Organic growth may or may not continue at its current pace
- Interest rates may or may not increase, impacting the marketplace
- Transaction prices may or may not plateau
Ultimately, it depends on how strongly the seller feels about the ongoing performance of the business.
However, more rare is the situation when we can directly point to a reason, with certainty, that a business should consider selling, and consider selling now. Changes to the tax code anticipated in 2022 indicate the capital gains taxes could increase from 20% (if your income is $441,451 or more) to 39.6% on income above $1 million. This could result in you owing nearly double the amount in taxes if the current proposed changes are implemented.
To think of this another way, if your business is worth $10M today, and the results are taxed as capital gains to the seller, this is a net of $8M after taxes. Under the new code, the net after taxes becomes $6.2M. So, if you kept your business, in order to get the same net from the sale 2 years from now, the business would need to be roughly valued at $13M. If all else remains the same, your business value would need to grow around 14% a year over that period to net the same proceeds available today.
If you know that you are most likely going to sell your business in the next few years, you might want to consider accelerating this timeline. While taxes are a critical component of making our great nation work, changes in tax code can have immediate impacts that should be considered when contemplating the timing of selling your business.