Michael G Wolff
While Democratic candidate Barack Obama promises tax cuts for 95% of Americans, his proposed tax cut would be shouldered in large part by Baby Boomer business owners as they reach their highest earnings years and look to sock away funds for retirement. (more)
As a youngster, you may have done something wrong and had a parent say to you, “It will be better if you tell me now versus having me find out on my own.” Well, it is a difficult lesson to learn and even harder to follow, but business sellers that don’t follow this rule risk wasting time and money and potentially ruining their chances at making a deal. (more)
Attend this continuing education class for business brokers and learn what the busines brokers learn. For only $105, you can attend this seminar offered by Kaplan Professional Schools and learn about selling your business in a pressure free environment. (more)
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Type: Business-to-business, manufacturing and distribution preferred.
Type: Business-to-business, manufacturing and distribution preferred.
Numerous studies show that career earnings for business owners are heavily waited at the end. Starting and growing a business usually requires a constant investment to satisfy increasing capital needs, often limiting the compensation taken by the owner. In fact, many business owners go years before they see any real return on their investment of time and money. It is not until they feel retirement nipping at their heels that many begin to harvest their hard-earned equity through greater compensation. Most look for a big pay-off when they sell their business.
The Obama tax plan would raise taxes on those earning $250K or more annually as Obama would roll back Bush's tax cuts for them. He would also extend and index the current AMT patch. Further, if he doesn't get your money through income taxes, Obama proposes an increase in capital gains tax as well.
Barack Obama supports returning the highest tax bracket back to 39.6% and he wants to make higher wage-earners pay Social Security taxes on more of their income. The 6.2 percent payroll tax is now applied to all wages up to $102,000 a year, which covers the entire amount for most Americans. Under Obama's plan, the tax would not apply to wages between that amount and $250,000, but annual salaries above $250,000 would be taxed under his plan.
An increase in capital gains tax from 15% to 25% is also proposed by Barack Obama. So, anyone selling a business would face a 40% increase in capital gains compared to today’s rates. As a result, business owners thinking about exiting their business have their decision complicated by potential tax code changes and the related economic consequences.
The Obama plan would likely reduce the number of businesses brought to market as some sellers will wait to accumulate retirement funds and/or hope for better tax treatment in the future. Considering the huge number of businesses expected to be sold over the next ten years, the lower supply in what is expected to be a saturated market may actually help business sellers. However, Obama’s policies will also likely have a negative impact on what is already expected to be weak demand for acquisitions.
Many economists feel there is little difference between John McCain’s tax plan and Barack Obama’s tax plan in terms of overall impact on the economy. It is argued that McCains tax plan, which features a reduction in corporate tax from 35% to 25% and maintains the current 15% capital gains tax, will result in a higher deficit. However, most agree that Obama’s proposed policies clearly reduce investment incentive for small business. Therefore, it would follow his plan would reduce acquisition demand as well.
According to the Institute for Research on the Economics of Taxation, Mr. Obama's tax hike would knock off $2.5 trillion in capital formation over five years, or nearly 2% of gross domestic product.
The election will alleviate some seller uncertainty, but the picture may not become clear for a long time. A McCain win would provide the most insight, but the election of either candidate does not guarantee their tax policies will be implemented as any tax reform must also go through congress. Further, with an Obama victory, it will take years before the political environment and the potential for reversal of any Obama tax policies is known.
In their desire to get the best price, business sellers may try to hide issues or conditions that may negatively impact the value of their business. However, in most cases their secrets are discovered and the ramifications can be devastating.
During a recent acquisition project, after many hours of discussions and many hours arranging financing, preliminary price and terms were established and a purchase agreement was drafted. Our buyer was excited about the deal, but red flags soon started popping-up when the seller began inhibiting the due diligence process. Despite the owner’s efforts to keep it a secret, it was discovered that their largest client, representing approximately a quarter of their sales, was in severe financial difficulty and in danger of filing bankruptcy.
The failure to disclose this material fact dramatically changed the nature of the relationship, making the buyer very skeptical. Ultimately, the failure to disclose lead to a lowering of the price offered and eventually the deal going south. It was devastating for both parties as each had invested a significant amount of time and money in the effort, and there is now the possibility of litigation. The worst part is that had the owner disclosed the situation the deal probably would have been done and any chance of litigation avoided.
Business owners would be well advised to take a page from what advertising agencies, political campaign gurus and public relations firms know - it is far better to disclose and spin. If you watch closely, you will discover this principal is evident in advertising, political campaigns and in public relations campaigns.
For example, when Scope first hit the market and was taking market share away from Listerine by touting its fresh mint taste, Listerine reversed the trend by highlighting its effectiveness. According to research, Listerine was effective for many hours while Scope only lasted an hour or two. Listerine highlighted this difference and came-up with the slogan “the taste you love to hate every morning.” The makers of Listerine admitted up-front that it tastes bad, but you will love it because it works better.
Tylenol did a similar thing when their product had been contaminated by strychnine. Rather then wait for the news to discover the situation and spew out all kinds of negative press, Tylenol immediately implemented a public relations campaign admitting the problem and outlining the their response in order to control the perception of the situation. As a result, lost sales were kept to a minimum and the event is now used as a case study in public relations (some suggest Tylenol actually benefited from the incident due to how the handled the issue).
These professionals understand the power of disclose and spin as it provides them with an opportunity to influence perception. They know in absence of information, people will usually assume the worst. Disclosure also promotes trust. And while trust is certainly important to mass consumers, it is critical for business buyers.
Business buyers want to make a deal, but they are afraid of making a bad investment. Buyers will usually work to find solutions and will often rationalize the problem to coincide with their desire to complete a transaction. On the other hand, when buyers uncover hidden problems it will likely cause a breakdown in trust and create doubt and fear. Once trust is lost and doubt and fear take over it is next to impossible to reverse, causing most deals to fail.
Business sellers that disclose the warts on their business (they all have them) have an opportunity to shape a buyers perception of the issue thereby mitigate any negative affects. Further, the act of disclosure promotes trust, which is an essential element in making a deal and an absolute requirement for getting the highest price.
"Business owners would be well advised to take a page from what advertising agencies, political campaign gurus and public relations firms know - it is far better to disclose and spin."