Tax Increases on Mergers and Acquisitions!





(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.




About Dan Flick

He understands that no amount of MBA and Ph.D degrees can provide familiarity, the know-how, or the skills to professionally and effectively represent and manage every facet within the M&A (mergers and acquisitions) process, including assisting in the decision process, positioning a company for sale, marketing the company to a specific and targeted market, and most importantly, closing the deal while always recognizing the emotional needs of the owner.