Jordan Ramis pc. Attorneys at law
Succession Planning: 2011 May Be Your Last, Best Chance
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This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

By Brad Eriksen
March 2011


The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, extending the Bush era tax rates, offers a limited and perhaps final window of opportunity for many business owners to implement succession planning strategies before punitive tax increases make it far more expensive.

In December 2010, federal officials reached a compromise to extend the then current federal income tax structure for an additional two years. Federal income tax rates and federal capital gains rates for all tax brackets were largely extended until December 31, 2012. It is important to note, however, that not all state income and capital gains tax structures were similarly extended. The extension of the federal tax structure provides business owners with what may be a final opportunity to implement a succession plan without sending a substantial portion of the proceeds to the Federal Treasury.

Business succession planning takes many forms. The three most common forms involve the sale of the business to an outside strategic or financial buyer; sale or transfer of the business to a select group of key employees; or sale or transfer of the business to select family members.

Depending on the structure of the succession plan, careful analysis and structuring are critical to minimize the tax consequences of a successful succession plan. While there are certain tax-free or tax-deferred transfer or succession planning strategies available (for example, ESOPs, certain types of mergers and intrafamily transfers) for the most part, transfers/succession plans are taxable events to the business owner.

Based on the tax increases currently scheduled to go into effect on January 1, 2013, the tax cost of implementing a succession plan could nearly double. For example, the top two ordinary income tax brackets increase by nearly 20 percent, counting phaseouts of deductions and exemptions. Capital gains tax rates increase nearly 60 percent when Obamacare tax increases scheduled for 2013 are included. Tax rates on corporate dividends nearly triple, again when Obamacare taxes kick in in 2013.

While many business owners are reluctant to consider selling their business now because of a perceived decrease in the value of the business due to the recent recession, the scheduled tax increases may in fact make this a good time to sell. Business valuations appear to be returning to historic standards. For example, EBITDA multiples for Lower-Middle Market companies ($10 million to $250 million enterprise value) have increased from the very low 5s in the latter half of 2009 to over 6 at the end of 2010. Smaller company valuations have not fared as well. However, with earnings poised to rebound as the recovery takes hold in 2011, business owners can expect a normal or better selling market over the next two years.

Additionally, economists are predicting a mild recession for 2014. This could affect the availability of capital for acquisitions and the willingness of buyers to purchase in a down economy. Indeed, according to the economists, the next opportunity to sell a business during a true economic expansion could be 2017. For many baby-boom generation business owners, waiting that long, essentially waiting until the last minute, might necessitate selling the business at fire sale prices (not to mention at significant additional tax cost).

Any succession plan takes time to develop and implement. Starting that process now could pay significant rewards in terms of tax savings, increased selling price, and peace of mind.