The prospect for higher capital gains taxes in 2013 has prompted some financial advisors to sell their practices by year-end to keep Uncle Sam from getting a bigger share of their hard-earned profits.

“My phone has been ringing consistently since the first quarter with firms looking to sell before potential changes to the capital gains rate,” says David Selig, CEO of Advice Dynamics Partners LLC, an M&A consulting firm in Mill Valley, Calif.
Much of this has to do with succession planning––or perhaps the lack thereof. Numerous studies have shown that only about one-quarter of advisors have a plan in place to transition their practice to new ownership. Selig says many advisors don’t take action until an exogenous event––such as health matters or pending government regulations––forces them to get into gear. “This [possible higher capital gains taxes] is another one of those events that’s tipped the scales for those considering doing something.”

With the Bush-era tax cuts set to expire on January 1, 2013, the current 15% long-term capital gains tax rate is scheduled to rise to 20%. And don’t forget to tack on the additional 3.8% tax on investment income for upper income earners as part of President Obama’s national health care reform. Add it up, and that’s a rate of 23.8% versus 15% (pending any changes during negotiations on the looming fiscal cliff between the president and Congress).

Greg Donaldson, founder of Donaldson Capital Management in Evansville, Ind., isn’t waiting around to see how it plays out. Donaldson, 65, says he started working on selling a “good chunk” of his shares in the business about a year ago. “We were intent on doing this no matter who won the election, but with Obama winning, the odds of a capital gains increase are much greater, so we’re moving a little faster,” he says.

Depending on how future rates shake out, Donaldson estimates that completing the transaction now will save him anywhere between $50,000 and $100,000.

But tax uncertainty isn’t the only reason that he wants to sell now. “We don’t know what prices [for acquired firms] will do under the new tax regime because these businesses are sold based on EBITDA (earnings before interest, taxes, depreciation and amortization), and it could be that the formula for that changes.”

Matthew Cooper, president of Beacon Pointe Advisors in Newport Beach, Calif., an RIA that seeks growth by merging smaller firms into its fold, says rushing into a sale to save a few bucks on taxes isn’t worth it. “If you haven’t done your homework and it’s not necessarily a good fit, the tax savings probably won’t outweigh the long-term misery you’ll go through.”

Selig, who works on both the buy and sell sides, says some sellers just want to take the money and run, while others plan to sell their business to another practice and hang around for a number of years to help it grow.

“If you’re thinking of doing it now and want to get something done by year-end, it’s probably too late,” Selig says. “The process takes a long time, and even if you know who you want to do a deal with, the closing period can be 60 days or more.”
––Jeff Schlegel