Owners Reconsider Exit Plans and Estate Plans

Taxes are in the air in Washington and, consequently, a lot of people are nervous. With President Joe Biden’s proposal to raise capital gains tax rates for higher-income taxpayers and significantly limit stepped-up basis, business owners are increasingly seeking business valuations with an eye toward revising their exit plans and their estate plans.

President Biden’s proposed the fiscal year 2022 budget, released on May 28, 2021, rolls in tax provisions contained in several initiatives announced earlier in the spring, including the Made in America Tax Plan, the American Jobs Plan, and the American Families Plan.

Chief among the proposed tax changes that are spurring an increase in requests for business valuations are:

  • A proposal to tax long-term capital gains and qualified dividends at ordinary income tax rates for taxpayers with an adjusted gross income of more than $1 million.
  • Ending stepped-up basis, which readjusts the basis value of an inherited asset to the point in time of the decedent’s death. Eliminating the step up in basis would subject certain heirs to long-term capital gains taxes on the appreciated value of inherited assets. The proposal includes a $1 million per person exclusion (or $2 million per couple) and certain exclusions for transfers to a U.S. spouse, charity, or for the transfer of tangible personal property, subject to valuation limitations.

Sense of Urgency

Uncertainty about whether any or all the president’s tax proposals will be enacted has created a sense of urgency for owners of family businesses, as well as business owners who thought their exits were a few years off but now believe they would be better off to act sooner.

In some cases, family business owners may have an easier time dealing with cash in their estate plans rather than closely held stock, so they are considering selling their businesses sooner than originally planned to avoid negative tax consequences.

Factors to Consider

 Business owners looking for a business valuation to guide them in preserving or enhancing the value of their companies in preparation for a transfer should keep in mind these factors:

  • How will your knowledge be transferred to a buyer? Much of the value in your company is in your head. Building a consulting agreement into your sale plan, which would require you to stay on board for a designated period, could enhance the value of your company to potential buyers. In addition, documenting what you do and how you run the company can help transfer some of the value to the new owners.
  • A business valuation will take a lot of work on your part to provide documentation and insight to the valuators. An extensive document list will be requested, as well as big chunks of your time to explain the value drivers behind your company’s success. Valuation is a combined effort between company owners and the valuators; it’s not just a matter of shipping off some financial documents and getting a number in return.
  • Be patient. A good business valuation takes time and an understanding that is built between the company owner and the valuator. The insights you can provide to the valuator about your company, your employees, your marketplace and your industry will be every bit as important as the financial data used in the valuation.

Final Legislation May Look Different

It’s important to remember that the president’s tax proposals have yet to be acted upon by Congress, and any legislation that passes may look very different than what has been proposed. We will keep you informed of the progress of any tax legislation.

While the president’s tax proposals may impact the timing and the shape of your business exit and estate plan, your personal goals will ultimately drive the decision about when and how to make these changes in your life. Obtaining a business valuation is a piece of a large puzzle, but it’s a major piece since your business probably constitutes the majority of your net worth.

If a business valuation would help you put the pieces of the business exit puzzle in place, contact your Adams Brown advisor.