The Importance of Quality Negotiations
When it comes to finalizing deals, successful negotiations are at the heart of the matter. It only makes sense to think about how to improve your communication skills and to choose a Business Broker or M&A Advisor who is well versed in the art of negotiation.
Cultivating Win-Win Situations
Achieving a win-win for all parties is essential, and there are many components involved. It’s essential to understand what the other party is seeking and to help them also feel as though they succeeded in the deal.
One tried and tested strategy is to lead people through a series of “yeses” by starting with topics and points that can be agreed upon and then working forward. In the beginning of this negotiating strategy, the yeses may come from getting others to agree on what may be seen as trivial things. However, this step works to create the right climate for moving forward so that yeses can be obtained on more important issues.
Maintaining the Flow of Information
The flow of information is a critical aspect of the negotiation process. For this reason, it’s best for negotiations between buyers and sellers to go through their brokerage professionals, rather than conducted directly.
The simple fact is that otherwise there are too many variables and opportunities for something to go wrong, ranging from egos getting in the way to miscommunications. When you choose a qualified Business Broker or M&A Advisor, you’ll be able to place trust in that person to achieve optimal outcomes.
Understand One Another
It is important to keep the other side talking and show that you understand their perspective and the issues they may have. It is in this way that you can encourage cooperation and diffuse resistance in advance.
Ultimately, great negotiations stem from proper strategy, preparation, proper education, enhanced communication, and understanding the other party’s needs. When you and your Business Broker or M&A Advisor foster good communications with the other party, it will enhance the chances of achieving the kind of cooperation you are seeking. This in turn, dramatically increases the chances of achieving win-win outcomes.
Copyright: Business Brokerage Press, Inc.
The post The Importance of Quality Negotiations appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
Market Trends Reported in the IBBA and M&A Source Market Pulse Survey: Second Quarter 2021
Created in 2012, the IBBA and M&A Source Market Pulse Survey was created to provide business owners and their advisors with a clear understanding of ever-changing market conditions.
Through this survey, it is possible to gain clarity on businesses being sold in Main Street (values $0-$2MM) and the lower middle market (values $2MM -$50MM). Scott Bushkie served as the originator of the Market Pulse Report with IBBA and M&A Source and has continued to play a key role since the report’s inception.
A core finding of the IBBA and M&A Source Market Pulse Survey for Q2 was that there has been a big shift between the turmoil of 2020 and the climate of 2021. Across the spectrum of sizes and price ranges of businesses, sellers now have an advantage or are at least in a better position to sell their business. This is quite different from the situation in 2020.
The market has shifted towards being a seller’s market for a variety of reasons including the fact that many private equity groups are now looking for ways to grow their money. Acquiring an existing business has become an increasingly attractive option to buyers due to the current labor pool conditions.
Buyers are now looking at existing companies as a way to bypass attracting talent. Instead, they can secure that talent via acquiring a new business. In short, many buyers are looking to buy versus organically build to meet their talent needs.
Another reason that now is a good time for sellers is that many buyers are looking to leave corporate America. This situation has likely been accelerated by the pandemic and people seeking to control their own destiny. The increase in global uncertainty has made the idea of becoming a business owner increasingly attractive.
The shift in climate from 2020 to 2021 underscores the value of the IBBA and M&A Source Market Pulse Survey. Through this revealing survey, it is possible for business owners and their advisors to gain a clearer understanding of market conditions and what to expect.
Copyright: Business Brokerage Press, Inc.
The post Market Trends Reported in the IBBA and M&A Source Market Pulse Survey: Second Quarter 2021 appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
Impact of Potential Tax Changes in 2021
The coronavirus pandemic resulted in changes to business taxes in 2021. Businesses saw many new tax incentives, breaks and rules as the U.S. government tried to combat COVID-19’s toll on the economy. Here are some of the new programs and changes:
- Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act introduced the Paycheck Protection Program (PPP) as an emergency loan that allocated billions of dollars to small businesses. The PPP is a forgivable loan, so long as the funds are utilized to fund payroll, rent/mortgage and utility payments. Any money a business received and was forgiven through the PPP is not considered taxable income, though any amount that is not forgiven is taxable business income.
- Economic Injury Disaster Advances and Loans (EIDL). To help businesses affected by mandatory shutdowns or economic slowdowns caused by the coronavirus pandemic, the U.S. Small Business Administration (SBA) expanded the EIDL program. A business that received advances from an EIDL is not required to include these amounts in taxable income. EIDL loans are handled like any other loan for tax purposes.
- Employee Retention Tax Credit (ERTC). Businesses affected by COVID-19 can use the ERTC to retain staff members. To qualify, a business has to have been fully or partially closed due to a government-mandated shutdown or experience a decline in gross receipts of more than 50% for any given quarter when compared with the same quarter in 2019. Employers that qualify for the ERTC are eligible for a tax credit equal to 50% of qualifying wages, up to $10,000 per employee between March 13, 2020, and Jan. 1, 2021.
- Families First Coronavirus Response Act (FFCRA). The FFCRA required certain businesses to provide sick/family leave to employees who were affected by COVID-19. Businesses that made these payments are eligible for tax credits for 100% of the cost of sick-leave pay, family-leave pay, qualified healthcare plan expenses and the employer’s share of FICA taxes for sick-leave expenses they incurred under the FFCRA.
- Business interest expense deduction increases. Finally, under the CARES Act, the allowable business interest expense deduction was increased for some business entities from 30% to 50% of adjusted taxable income.
Key takeaway: The CARES Act, EIDL, ERTC and FFCRA played key roles in helping businesses weather the coronavirus storm in 2020. It is important to know how these changes may affect your taxes in 2021.
How future tax changes may impact small businesses
Small businesses are a driving economic force in the United States, with nearly 32 million firms (including sole proprietors) employing almost half of the nation’s private workforce (Small Business Administration).
Higher tax rates may impact certain pass-through businesses
Most small businesses are S corps, LLCs, partnerships, or sole proprietorships, and are structured as pass-through entities. Net income generated from these businesses flows-through to the owner’s individual tax return. Under the current House proposal, higher-income business owners would face a top marginal tax rate of 39.6% instead of the current 37% tax rate. Under the proposal, the top rate would apply to those with more than $400,000 in taxable income ($450,000 for married couples filing a joint return). The higher rate would apply to taxable years beginning after December 31, 2021.
The 3.8% surtax to include “active” business income
For nearly a decade, higher-income taxpayers have been subject to a 3.8% surtax on net investment income including, for example, interest from investments, capital gains, dividend income, rental income, royalties, and income from a business activity where the taxpayer is not considered an “active” participant. Under the current rules, income received by an individual who is actively participating in the business as defined by the tax code is not subject to the 3.8% surtax. The new proposal would modify this to impose the surtax on net investment income derived in the ordinary course of a trade or business.* This provision would apply to those with modified adjusted gross income exceeding $400,000 ($500,000 for couples) and is effective for taxable years beginning after December 31, 2021.
* The proposal would ensure that all pass-through business income of high-income taxpayers is subject to either the net investment income tax (NIIT) or self-employment tax.
Limits on the deduction for qualified business income (QBI)
The Tax Cuts and Jobs Act (TCJA) introduced a provision in the tax code which provides a 20% deduction for certain taxpayers receiving income from pass-through businesses depending on the nature of the business and their income. The current House proposal would set additional limits on claiming that deduction by limiting the amount of the total deduction to $400,000 for an individual tax return and $500,000 for a joint return. Note there are some other proposals being discussed in Congress, including the Small Business Tax Fairness Act, that would disallow the QBI deduction for taxpayers with income exceeding $400,000.
Restrictions on certain wealth transfer strategies
Since the House proposal calls for reducing the lifetime gift and estate tax exclusion from almost $12 million per person to roughly $6 million beginning in 2022, those holding a significant portion of their net worth in closely held business interests may need to review their current estate plans. There are a number of advanced strategies available to taxpayers to transfer closely held business interests tax-efficiently with respect to estate and gifts taxes, and potentially to income taxes. For instance, applying valuation discounts when transferring shares of a closely held business to the next generation. The IRS allows a “lack of control” discount when minority interest shares of a business are transferred. The lower the business ownership shares are valued, the greater the number of shares can be transferred under the existing gift tax rules. Another strategy involves selling appreciated shares of a closely held business to an intentionally defective grantor trust in exchange for a long-term promissory note. There may be no capital gains realized on the sale of the assets to the trust, and transfer of assets to the trust removes them from the grantor’s taxable estate.
The House proposal targets both of these strategies. First, valuation discounts would no longer apply to non-business assets, defined as passive assets that are held for the production of income and not used in the active conduct of a trade or business. Passive assets may include investment securities held by the business, for example. Valuation discounts would still be available for assets that are utilized during the normal course of operating the business. Lastly, the proposal would also, for example, consider the sale of assets to a grantor trust a taxable event if the grantor is deemed an owner of the assets. The effective date for both of these proposals is after the date of enactment, which means when the bill is signed into law.
House plans underscore the need for tax planning
Odds seem increasingly likely that Congress will succeed, using the budget reconciliation process, in passing a tax bill between October 1 and the end of the year.
The House proposals, and the larger debate to follow on budget reconciliation, could result in higher taxes for businesses. There are many ways that smaller businesses could face higher tax liabilities if these measures are approved. As with all policy developments, it’s important to monitor potential changes and discuss the impact on financial plans and tax-smart planning with a professional advisor or tax expert.
Tax changes alone shouldn’t dictate your decision to sell. That said, specific proposals under President Biden’s American Families Plan are impacting exit planning. Most salient include the proposal to nearly double the top long-term capital gains tax rate to 39.6% (43.4% if you include the net investment income tax), and taxing the appreciated value of unsold assets at the owner’s death. Long-embraced strategies for tax planning efficiencies are being upended by these proposals.
Consider, for example, a business owner planning to make a bequest of family business interests to his or her children at death. The owner could see that bequest treated as if it were a sale for income tax purposes, taxable at the 43.4% capital gains rate (subject to certain exemptions and payment deferrals); in effect, the owner could see a loss of the basis step-up tax benefit for gifts from holding those assets until death. Moreover, this tax would be independent of the gift and estate tax, currently assessed at 40% on amounts gifted or transferred at death in excess of $11.7 million per person. An increased estate tax rate and a lower exemption amount under the Biden plan would exacerbate the tax hit.
Key takeaway: Often you as an owner don’t have the luxury of scripting the precise timing and path between formation and exit. If external forces (e.g., market conditions or tax law changes) are driving the sale of your business before year-end, there’s still time for effective estate planning measures.Acting now could have a meaningful impact.
Read MoreImportant Points for Selling to a Family Member
Eventually every business owner will have to turn over control of their business to someone else. There are many options for how this can play out. They range from selling the business to a prospective buyer or selling to a competitor, to turning your business over to a family member. It is key that you start thinking about these options years before you end up in a situation where you actually have to sell.
Working with a Business Broker or M&A Advisor is one way to determine what sales options are optimal for you based on your specific situation. Let’s explore some of the variables you’ll want to consider when you decide to transfer your business to a family member.
Tax Advantages
There are some significant advantages to transferring your business to a family member. No doubt topping the list of advantages of going this route is the fact that the transfer can be considered a gift. One advantage of this approach is that you’ll reduce your real estate taxes. Depending upon how the agreement is written, you also may be able to maintain some control over the business. For many business owners, this factor can be a big advantage.
Seller Financing
One issue you’ll want to explore when opting to transfer your business to a family member is seller financing. Seller financing is a common practice when it comes to buying and selling businesses in general. This type of financing is even more common where transfers to relatives are concerned.
Seller financing opens up the versatile option of implementing a private annuity. A private annuity can serve to spread payments out across a long period of time. This could be a win-win situation for both you and your relative. You would receive a long-term stream of income as a result of ongoing payments. In turn, this decision may very well make ownership more financially realistic for your relative.
Legal Agreements
Keep in mind that if you sell your business to a relative, this in no way negates the need for a buy-sell agreement. Even when you are dealing with your most trusted family members, legal agreements must be firmly in place. A buy-sell agreement is an invaluable tool that protects everyone involved.
This contract clearly outlines all aspects of the arrangement. Your buy-sell agreement should include such key information including the value of the business, amount being paid, information on which employees will be retained, the current business owner’s level of future involvement, and much more.
Working with Professionals
Ultimately, there are a range of potentially powerful benefits associated with transferring a business to a relative. While it is true that you can expect the IRS to closely evaluate the sale, this should not dissuade you from considering this option. Business Brokers and M&A Advisors are experts at buying and selling businesses, and they understand the specifics of transferring a business to relatives. Working with professionals early in the selling process can help you gain tremendous insight into the best way to proceed.
Copyright: Business Brokerage Press, Inc.
The post Important Points for Selling to a Family Member appeared first on Deal Studio – Automate, accelerate and elevate your deal making.
How to Circumvent Three Legal Mistakes Sellers Make
After decades of hard work, selling your business can be an exciting and rewarding time. Yet, many business owners overlook the importance of focusing on the legal matters associated with sales. In this article, we’ll explore three of the most significant mistakes sellers make.
1. Use an NDA
The first critical mistake that business owners should be guarding against is skipping the use of a non-disclosure agreement. Simply stated, a business owner should always make sure that a non-disclosure agreement is in place before disclosing to any buyers that a business is on the market.
NDA’s stand as an invaluable way to restrict who does and does not know your business is for sale. After all, the last thing any business owner looking to sell his or her business wants is for competitors or employees to learn confidential information.
2. Hire an Attorney
The second critical mistake that many business owners make is they skip working with an attorney. There is no way around the fact that if you are selling a business, or for that matter anything of significant value, you need to work with a lawyer experienced in the area of sales.
Business owners become accustomed to doing a great many things themselves and learning on the job. There is no doubt that this is a personality trait that has served them well over the years. However, when it comes time to sell your business, there is zero room for “on the job training” or relying on your own instincts. One of the best ways that you as a business owner can protect your future is to work with a lawyer when selling your business. In fact, a Business Broker or M&A Advisor can be a vital resource for helping you to find a proven lawyer with a background in the buying and selling of businesses.
3. Get a Letter of Intent
A third significant mistake that business owners frequently make when selling their business is that they fail to get a letter of intent. Much like an NDA, a letter of intent is a key legal document in the process of selling a business. All too often business owners will skip requesting a letter of intent out of fear of slowing down the process and potentially disrupting a deal.
The letter of intent is designed to both clearly spell out expectations, while simultaneously protecting your interests as a business owner. When a buyer signs a letter of intent, it indicates that he or she is taking the process seriously. This will protect you from wasting your time.
The process of buying or selling a business is complex in many different ways. Whether it is dealing with human psychology, organizing your books, thinking about what information prospective buyers are likely to want to see, or addressing a wide array of legal issues, it is a complex and time-consuming process. Working closely with a Business Broker or M&A Advisor is one of the fastest ways that you can increase your chances of a successful sale.
Copyright: Business Brokerage Press, Inc.
The post How to Circumvent Three Legal Mistakes Sellers Make appeared first on Deal Studio – Automate, accelerate and elevate your deal making.