Enterprise Services, Inc. Business Transitions and Valuations
A Note From the Author of Buyouts

Scott MillerOver the past 10 to 15 years, business owners felt confident about their ability to sell their businesses. There was the perception that there were many buyers waiting for the opportunity to acquire a business, bank resources were generally available to finance such transactions, and capital gain taxes were at historic lows. This thinking is not reflective of today’s business environment. Circumstances have changed, and business owners must begin to make decisions in the upcoming uncertain future.

There are several important forces at work in our current economy, and the confluence of their impact has broad and far ranging significance for business owners that challenge the too comfortable thinking of the past.

First, we passed a significant milestone with the financial meltdown of Wall Street in the fall of 2008. Within just a few weeks, the entire face of the financial industry was systematically changed as one whole segment of investment banking capabilities was irrevocably altered. Linked to the implosion of the housing market and the subsequent torrent of bad debt, the banking industry shifted to preserving capital and avoiding most lending activities with any significant risk attached to it. Suddenly, commercial credit for middle market firms disappeared or was significantly reduced.

Second, there is a wave of “boomers” coming to retirement age. The oldest members of the baby boom generation (1946-1964) are turning 65 in 2011. While many refuse to face reality regarding aging and approaching retirement, the fact is that an estimated 90 million of them will be retiring during the next 10-15 years. Much of the wealth of the boomer generation is committed to equity in closely held businesses, and releasing those resources for retirement purposes will have a telling impact on our economy. It is believed that there will likely be far more sellers of businesses than buyers as the torrent of boomers seeks to ease into retirement.

Third, short of a new law changing the current statute, there is an almost certain material increase in taxes coming by January 1, 2013. The increase is the direct result of “sunset” provisions in the tax cuts passed in the early 2000’s, often referred to as the Bush Tax Cuts. Tax rates for capital gain and ordinary income will reset to the comparable rates in 2001. For example, the Federal capital gain rate will increase from 15% to 20%. Additionally, the new Patient Protection and Affordable Care Act passed in 2009 will impose surtaxes on certain capital gain and ordinary income taxes. State and local taxes on the sale of a business combined with Federal obligations will have a substantial impact on the net proceeds realized by a business owner.

In summary, there will be far fewer buyers with cash waiting to acquire companies. Business owners are well advised to be proactive and begin today to consider options that do not involved third party buyers. There is a whole range of candidate buyers for the business including managers, key employees, family members, Employee Stock Ownership Plans (ESOPs) and private equity firms in concert with management. Selling to one or a combination of these buyers often results in a desirable outcome, but such a positive conclusion takes careful planning and above all, time. This book, Buyouts, will demystify and provide a detailed look into the complex world of inside buyouts.

Enterprise Services, Inc. Business Transitions and Valuations
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