There is no simple answer as to when is the perfect time to sell your business. A variety of factors drive the equation – factors that fluctuate constantly and vary greatly in how they affect individual businesses and families. However, if you are on the fence about selling your business or are contemplating a sale in the near future, there are some recent developments that can certainly tip the scales one way or the other.

One of the biggest factors is taxes, and President Biden’s proposed tax plan could bring significant changes to the tax landscape. If you have been working hard trying to make your business more valuable to potential buyers—by increasing profitability or EBITDA, for instance—you should consider whether your efforts will be worthwhile in light of the expected changes coming to the current low-tax environment.[1]

Ultimately, if your goal is to maximize your after-tax profit from selling your business, your efforts to increase your business’s value will need to outpace the anticipated tax increases. Otherwise, efforts to hold and grow your business may not yield the desired after-tax profit and you might be better off selling now.

Biden’s Plan

President Biden’s proposed tax plan features a dramatic increase in long-term capital gains tax rates. Currently, the tax rate applicable to ordinary income is significantly higher than the tax rate applicable to long-term capital gains. If Biden’s tax plan is passed, the favorable treatment of capital gains will be eliminated for many business owners.

Under current law, the maximum long-term capital gains tax is 20%. However, under Biden’s proposed plan, that maximum rate would nearly double: for individual taxpayers who realize more than $1 million of gross income in a taxable year, Biden’s proposed plan would tax capital gains as ordinary income. As a result, the maximum long-term capital gains tax rate for those taxpayers would increase from 20% to 39.6%.

Impact of the Plan

If Biden’s plan is passed, the basic economics of a potential sale could change entirely. For example, if you sold your business for $15 million today and you realized a $10 million gain, you would pay $2 million in capital gains taxes (assuming you owned the business for more than one year) and you would take home roughly $8 million of profit. However, if you sold the same business after Biden’s proposed tax plan became effective, you would pay $3.96 million in taxes and would take home just over $6 million of profit.    

Is the Juice Worth the Squeeze?

The above example assumes your business will be worth the same amount before and after Biden’s tax plan becomes effective. What if you waited to sell until after Biden’s tax plan is passed, but you were also able to grow your business and increase its valuation?

Let’s say you wait two years and, as a result of your efforts, you increase your business’s valuation by 20%. Instead of selling the above business for $15 million, you sold it for $18 million – sounds great in theory, but was it worth it? The numbers say no. If you sold your business for $18 million under Biden’s tax plan and realized a $13 million gain, you would pay $5.15 million in taxes and would take home $7.85 million.

After two years of hard work, your profit from selling your $18 million business ($7.85 million) would be less than if you sold your $15 million business in the current low-tax environment ($8 million).

Of course, this is a simplified example that relies on certain assumptions. We don’t know exactly what the final version of the plan will look like just yet: the actual long-term capital gains rate could end up lower than 39.6%; the threshold for applicability of the increased rate could remain at $1 million of yearly income, or it could be higher; the tax plan could take effect next year, or it could take effect retroactively as Biden recently proposed; and so on. Nonetheless, changes to the tax code are coming in some form and it is very likely that capital gains taxes will be increased. It is important to consider how these changes will impact  your decisions regarding when to sell your business and how to structure a sale in this changing tax environment.

[1] As a caveat, President Biden recently announced that the proposed plan will be retroactive as of April, 2021, which may make this analysis moot. However, the plan’s retroactive effective date faces opposition in Congress and there is a growing consensus (and hope) that the tax increases will not be effective retroactively.