As a seasoned online business entrepreneur I’ve seen my share of market shifts and tax changes but nothing quite like this recent wave.
The Biden administration’s capital gains tax hike has thrown a wrench into many exit strategies especially for those of us with businesses valued at over a million dollars.
It’s like a double whammy.
Not only are we facing higher tax rates but the window of opportunity for selling before these changes kick in is rapidly closing.
Is It Too Late to Sell Your Online Business?
The clock is ticking and many business owners are understandably feeling the pressure.
The good news is it’s not entirely too late.
The Grandfathering Rule: A Glimmer of Hope
The Biden administration included a grandfathering rule in its proposal.
This means you can still benefit from the old tax rates if you entered into a binding sales contract before September 13 2021 and close the deal before the end of the year.
Think of it as a last-minute lifeline for those who were already in the process of selling.
However the rule does create a tight timeline and may require some fast-paced negotiations.
The Surtax and NIIT: Don’t Forget the Fine Print
While the grandfathering rule helps with the capital gains tax rate there’s another wrinkle: the surtax and NIIT.
These tax increases don’t take effect until the new year meaning that even if you can’t make the deadline for the grandfathering rule you might still want to consider closing a deal before January 1st.
This could give you a slight advantage even if you’re facing the higher capital gains rate.
The Seller’s Market: A Silver Lining in the Clouds
The tax changes have created a unique situation: a surge in activity within the online business acquisition market.
Investors are rushing to get their deals done before the new year putting those of us looking to sell in a very favorable position.
The “Season of the Seller”
This surge is known as “The Season of the Seller.” It’s a hot market with investors eager to snatch up good deals before the tax changes take effect.
This means you have more negotiating power and can potentially get a higher price for your business.
The Numbers Don’t Lie
The numbers tell a clear story: The average sales price for online businesses has skyrocketed in recent years.
We saw a massive increase in 2020 and the momentum hasn’t slowed down.
It’s a fantastic time to capitalize on this trend but you have to act quickly.
Navigating the Tax Hike: Strategies for a Successful Exit
The tax changes are a real challenge but there are strategies to help you navigate the situation and still achieve a profitable exit.
Extended Earnouts: A Creative Solution
One option to consider is an extended earnout.
This structure allows you to receive a portion of the purchase price upfront while the rest is paid out over a longer period of time.
This can be a win-win for both the buyer and seller.
The buyer can spread out the costs while the seller can stay below the tax threshold for each year.
Trust and Transparency: The Key to Success
With extended earnouts trust becomes absolutely crucial.
You need to be confident in the buyer’s ability to run the business successfully and generate enough cash flow to make the payments.
Do your due diligence on the buyer and make sure they have the experience and expertise to keep your business thriving.
The Bottom Line: Timing is Everything
While selling your business is a major decision the tax changes have created a unique set of circumstances that make it particularly advantageous to exit before the new year.
It’s important to weigh your options carefully and consult with financial and legal professionals to determine the best course of action.
But if you’re thinking about selling your online business now might just be the perfect time to do it.
The market is hot the demand is high and you have a lot of leverage to negotiate a great deal.