Pandemic aid and the looming election have changed the potential tax situation, and other considerations, when selling a business.
“Plan ahead,” said Brian Weiner, managing partner at Audent Family Wealth Advisors in Los Angeles. “It’d be unfortunate to sell your business after 30 years of hard work only to have your gains go to state and federal taxes.”
Right now, Paycheck Protection Program (PPP) loans, potential payroll tax deferment and the modifications for net operating losses under the Coronavirus Aid, Relief and Economic Security (CARES) Act are the most significant pandemic-related measures when selling a business, said Joe Roberts, senior vice president and senior wealth strategist at Rockefeller Capital Management in Philadelphia. “All three have the potential to alter purchase price, and sellers should expect ... a thorough review of their PPP application and certifications.”
Business owners also need to weigh valuation issues against the potential increase to capital gains tax rates proposed by likely Democratic presidential candidate Joe Biden, Roberts added.
“PPP loans are, in and of themselves, not overly complex, but the rules governing their forgiveness are still being developed,” said Howard Krieger, managing director in CBIZ Valuation Group in New York. “Buyers have to do more due diligence around the loan application and the expected use of loan.” Other pandemic-related economic measures, such as the Economic Injury Disaster Loan program or the more familiar Small Business Administration 7A loan program, are opportunities for companies to optimize their capital structure or renegotiate supply-chain financing measures, Krieger said.
“Go through the loan forgiveness process before you sell your business,” said Julia Carlson, CEO and founder of Oregon-based Financial Freedom Wealth Management Group. “You’ll need to provide proof the that funds were used for qualified expenses.”
“The government has implemented rules for change of ownership prior to PPP forgiveness or paying off a loan,” added Jeff Fazio, head of small business specialists for TD Bank in Mahwah, N.J.
Even after pandemic-related economic measures, “basic blocking and tackling still stands,” said Daniel Gibson, tax partner at EisnerAmper in Iselin, N.J. “Identify expenses that would otherwise be personal perks so a buyer can get a truer picture of potential profits. Make sure to check off all your compliance requirements with governments. It’s worth a phone call to each jurisdiction to make sure all of your filings and payment obligations are up to date. If you have key people the buyer is going to want to keep, make sure a plan on how to keep those people is discussed early.”
Owners typically underestimate the time and effort involved in selling businesses. “Buyer and seller normally go through a pre-ritual with one another to build a rapport. Dealing with a sale in our new virtual world can make this somewhat daunting,” Gibson said. “Buyer due-diligence, even in normal times, requires the focus of internal personnel and outside professionals. Add challenges for the buyer performing due diligence during a pandemic and you have a recipe for a real pressure cooker.”
“Pre-Covid-19, there were standard industry and economic expectations based on size and industry, and there were fairly standard ways to confirm one’s quality of earnings. In today’s environment, a seller may need to know more about its vendors, customers and supply-chain verticals, as well as multiple scenarios that could play out over the next several months,” Krieger said.
What's the advice for sellers of a business now? “Patience,” said Kevin Mayer, managing director of Citizens M&A Advisory in Cleveland. “The M&A and acquisition finance market is very fluid right now. The M&A process is also changing: Zoom management meetings are no longer a novel idea and becoming more status quo and off-site due diligence is not only a trend but a requirement in certain circumstances.”
Assessment of a business in this economy “really depends on the company and the industry,” Mayer said. “There are businesses that are Covid-resistant and able to sell at a full valuation, and even premium valuations, in today’s market.” Examples, he added, include segments of technology, health care, business services and packaging.