The pandemic has set the stage for grand economic changes following the election. One such change is a proposed increase in the capital gains tax rate from its current Federal level of 20% of taxable gains to NEARLY DOUBLE that (up to 39.6%) included in the Democratic tax plan.

In addition, there is also proposed legislation in motion in California that would potentially raise the California tax rate on income (there is no real capital gains rate in CA) over $1 million from 13.3% to 14.3%, with a maximum rate that could increase to a staggering 16.8%.

This means an owner of a California-based business, sold under the current tax structure at 7.0x EBITDA, would potentially need to sell the business for over 10x EBITDA under the proposed tax structure in order to receive the same after-tax proceeds.

Viewed from another angle, a business will need to increase its EBITDA by over 40% just to get the same after-tax proceeds to its owners if these pending tax changes go into effect. For most companies and their owners, this represents a lot of extra work, extra investment, and extra risk—just to get to the same place.

While we typically believe that allowing potential tax changes to drive strategic exit-timing decisions is akin to letting the tail wag the dog, the magnitude of these proposed changes may make this one different. If you are considering selling a business in California in the near future, you may want to include these potential tax changes in your assessment of the right timing.

If you have any questions about the above information or would like DCA to do an analysis of the impact on your particular situation (at no cost), please reach out to us, or reach out to your own tax advisor. DCA is proud of our ability and track record of getting our clients maximum value for their businesses and we want to make sure they get to keep as much of those hard-earned proceeds as possible!