Tax Increases on Mergers and Acquisitions!

ACTIONS HAVE CONSEQUENCES

IMPACT OF TAX INCREASES ON MERGERS AND ACQUISITIONS

by

THE M&A LAW FIRM
ROGER L. NEU, JD, CPA, PRINCIPAL

(posted with written permission)

Federal taxes on the sale of a business increased by 8.8% in 2013 from 15% to 23.8%.  This increase consisted of a 5% increase in the federal capital gains tax and an added Medicare tax of 3.8%.  California also increased its tax rate by 4% (from 9.3% to 13.3%).  Middle market business sellers are experiencing significant consequences from these increases.  For example, in a recent transaction my client who had considered selling in 2012 decided to wait and sold in 2016.  As a consequence the client had to pay an additional $4M in federal and California capital gains taxes.  But wait, the fun doesn’t stop there.  Hillary Clinton is proposing an additional 4% surtax on income above $5M (every middle market business sale).  Under Clinton’s proposal, the new top combined federal and California tax rate would be about 41.5% which is 17% higher than the combined 2012 tax rate (actual rates may be slightly less depending on the benefit derived from the deduction of California taxes and other allowable deductions).  

When business owners are faced with higher and higher taxes they are forced to make decisions that have practical consequences for not just the owners, but for employees and many others in society.  Businesses reduce the number of employees (with more automation), turn full time jobs into part time jobs, delay the sale of the business, reduce employee bonuses upon the sale, reduce giving to charity, reduce future risk taking to preserve proceeds from the sale, etc., etc., etc.  Buyers/investors pay less for businesses, because increased taxes reduce their rate of return (increasing risk).  Tax increases have consequences. 

I care about the M&A market and most people receiving this newsletter have a vested financial interest in the success of the M&A market. Service providers as well as businesses will see their taxes increase under a Clinton administration.  I estimate that one to two percent of the people getting this newsletter are excited about tax increases (spreading the wealth), but the rest of you don’t believe that “government is the answer.”   

Income and capital gains taxes are just the tip of the iceberg.  Beneath the surface there are other proposed taxes (carbon and energy taxes, health care taxes, increased estate taxes, etc.), and many business (middle market) killing regulations.  In this election year, sitting on the sidelines is only an option if you don’t care about the consequences.  Providing your financial support and voting for candidates promoting business growth in America will have significant consequences in maintaining a vibrant M&A market which will help everyone. 

Please share this information with as many people as possible, because there are a lot of people who are not aware of how much tax rates have increased (and may continue to increase) and how detrimental that is to America.

Regards,
Roger

 

 

Maximizing Company Valuation in 2016

In this excellent article from Axial in their FORUM: THE SELLER SERIES, the writer expresses important factors in increasing your company’s valuation during 2016.  Whether you are selling right now or in the critical phases to setting up your company for sell, there are key points that include cleaning up your cash flow, addressing often overlooked value maximizers, to increasing your financial and strategic value.  This article is a must read.

How_to_Maximize_Valuation_in_2016

 

What is a Sale Leaseback

provided by AIC Ventures

Despite not being in the business of owning real estate, many companies find themselves having substantial equity tied-up in their real estate. By exchanging that illiquid equity for cash and entering into a long-term structured lease agreement, a business can free up the equity held in its property while continuing to benefit from the use of the assets.

In simplest terms, a real estate leaseback (often called a triple-net lease ) is the process of selling real estate while simultaneously entering into a long-term lease for the same real estate. The maximum possible value is extracted and there is no disruption to operations. A sale leaseback transaction has a number of benefits for mid-market companies: Retain Control of Real Estate

AIC Ventures structures our leases on an absolute net basis. A lease is structured so that the business continues to operate as though they own the property. For the duration of the lease, the company remains responsible for utilities, insurance, maintenance, repairs and property taxes. The company is also free to use the interior of the structure with few or no restrictions.

Tax Benefits

As a lessee companies are able to write off their entire lease payment. By contrast, a property owner can only deduct interest and depreciation expenses.

Extract More Value

A mortgage is limited by a lender’s loan-to-value requirements that reduce the amount of equity available to the company, currently 60-70% of the property value. A sale-leaseback provides 100% of the Fair Market Value of a business’s real estate.

No Financial Covenants

A company can remain more independent in its operations because a sale leaseback does not require any financial covenants. Banks and other lenders often have multiple financial covenant restrictions.

Attractive Financing

When compared to expensive mezzanine financing a sale-leaseback and cost of rent payments is often cheaper and does not require any collateral to secure the funding.

When EBITDA Is Just a Number: The Limitations of EBITDA

By Karen Sibayan | January 20, 2016

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“EBITDA is only the starting point and due diligence should result inContinue…

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What to Consider When Competitors Make an Offer

Infinity Financial Group, June 2015

Competitors are NOT the best acquirers.  They always know more than you and do a better job.  At least that is what most think can make for very difficult, if not a recipe for a disastrous transaction for both parties.  However, this is not always the case and a competitor’s money is as green as yours, just do not cast off an offer just because of pre-conceived notions but caution is always advised.Continue…