Buying Opportunities From Wealth Transfers

No matter your political affiliation, if Joe Biden wins the upcoming election and Democrats control both chambers of Congress, you can expect to see major changes to the tax code, and based on his proposed changes you can also expect to see a wave of small business owners cashing out and selling their businesses early before these changes take effect.
Here are the major components of Biden’s tax plan that will push many business owners to sell their businesses sooner rather than later under a Biden tax regime:

• The top income tax rate will be raised from 37% to 39.6%.
• Capital gains will be taxed at ordinary rates. For those with annual incomes over $1 million, that means a tax of 39.6% on capital gains.
• The corporate income tax rate will be raised from 21% to 28%.
• A 12.4 percent Social Security payroll tax will be imposed for wages above $400,000.
• Phase-out of the “small business tax deduction” on pass-through earnings (otherwise known as the qualified business income deduction) for filers with taxable income above $400,000.

Besides the increased cost of staying in business from the increase in the corporate rate, the social security payroll tax, and the phaseout of the small business income tax deduction, small business owners will also pay dearly when they sell their business.

Compare the tax bill from selling a $4 million business under the current tax code and the tax bill under Biden’s reforms:

CURRENT CODE – 

• Sale Price: $4,000,000
• Basis: $200,000
• Capital Gains: $3,800,000
• Tax Bill (20%): $760,000

BIDEN’S PLAN – 

• Sale Price: $4,000,000
• Basis: $200,000
• Capital Gains: $3,800,000
• Tax Bill (39.6%): $1,504,800

DIFFERENCE –

• $1,504,800 – $760,000 = $744,800

As expected, for the highest earners, selling a business means paying nearly double the taxes under Biden’s tax proposals vs. those under the current rules.

For those holding out to pass the business onto their heirs expecting a step-up in basis to avoid capital gains, you can also kiss this loophole goodbye as Biden has proposed to tax unrealized capital gains at death as well. That means your kids will be stuck with that huge tax bill at your passing.

What This All Means for those Looking to Acquire a Business?

For those in the business of acquiring undervalued businesses, Biden’s tax proposals could mean a wave of small businesses hitting the market at the same time competing for buyers.

This could mean substantial opportunities for buyers looking for bargains from sellers willing to take a hit on the sale price to avoid a big tax bill.

Even before this election cycle, Baby Boomers retiring in droves and selling their businesses were already creating a robust supply of businesses for sale on the market. Now, if a Biden presidency and Democrat-controlled House and Senate come to fruition, we can expect the pace of businesses to hit the market to accelerate at breakneck speed.

For entrepreneurs who have successfully run businesses before and who have the right mix of skills, talents, experience, analytical tools, infrastructure, personnel, operations, and business network, there are so many reasons for acquiring existing cash-flowing businesses including:

• The kinks have already been worked out. Somebody already overcame the steep learning curve so you don’t have to in a particular industry or market you might not be an expert on.
• Many of these businesses are already profitable but have potentially significant room for improvement. Value-add opportunities abound and with the right tweaks to improve efficiency, increase income, and decrease expenses, net income could be improved substantially.
• Many of these businesses already have skilled personnel in place that would eliminate the need to rehire. By infusing their personality and approach, an entrepreneurial acquirer can improve the business while remaining hands-off – freeing time to pursue other ventures.
• There are so many options to choose from. At any given time, there are tens of thousands of existing businesses available for sale in dozens of industries across multiple segments.

For those ready for the coming political and economic changes, there will be plenty of opportunities to acquire a stable, existing business to add to a portfolio of cash-flowing assets vital for building wealth.

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Michael Foley

Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.