What will the new rate be? Will it be enacted retroactively? Is there any chance changes won’t go into effect until 2022?

These are some of the questions swirling the sleepless minds of business owners contemplating the sale of their company this year. Imagine being a founder who’s poured fifty-plus years into building a company from nothing, and the tax swing resulting from the sale of your $50 million business could be in the neighborhood of $11-22 million depending on the proposed changes to capital gains.

For owners who already survived the last recession and managed to keep the lights on through a pandemic, odds are they thought there was a legitimate chance at retirement soon. Unfortunately for owners, no buyer is going to gross up the purchase price to cover their taxes due on the sale proceeds. This is a real and extremely stressful predicament for owners right now. So what’s an owner to do? Sell and pay now, wait it out and pay later? Or maybe it’s possible to pursue a different plan of succession that reduces near-term stress and uncertainty?

Most owners pursuing a sale understand the common buyers likely interested in their business—family members or the company’s management team, competitors or strategic buyers, private equity funds or other investment firms; however, few owners are familiar with employee stock ownership plans (ESOPs) and their related tax advantages.

When selling a company to any buyer other than an ESOP, the seller(s) will pay capital gains tax on proceeds from the sale. When a company is sold to an ESOP, the seller(s) may be able to defer the capital gains tax. As a result, the net proceeds to a business owner from the sale to an ESOP may be more than the net proceeds available from the sale to a strategic or financial buyer after taxes are paid. 

Selling to an ESOP can offer owners initial liquidity through the most tax-efficient strategy while creating a succession plan that allows them to work towards a full exit. When it comes to determining if now is the right time to sell, there are more variables to consider besides tax, and it’s important to understand that ESOPs are not a fit for every company. 

Owners are encouraged to work with an advisor to understand the range of considerations pertaining to value, current market dynamics, liquidity needs, tax planning, and any qualitative objectives they’d like to achieve in a sale process. Analyzing all of these factors may lead an owner to wait and instead pursue near-term opportunities to increase profits while capitalizing on economic trends. Working with a team of economic experts like ITR Economics can further bolster a company’s forecasts and growth plans, and with a 94.7 percent forecast accuracy, they’re one of the best resources available.

ADDITIONAL RESOURCES