With the re-election of President Obama, business owners may be asking themselves how the result will affect their future, specifically if they are considering exiting their business in the short term. With the economy still struggling and small business valuations remaining depressed, they'll look to the President to help turn the market around and improve their chances for a successful, profitable exit.
While no one can be certain as to what the next four years will bring, especially given the close popular vote result and the divisions that remain in Congress, the President's election platform points to a few likely outcomes.
Capital Gains Tax Rate
Perhaps the issue that will have the biggest impact on potential small business sellers is the much-discussed capital gains tax rate. President Obama and Congress agreed in 2010 to extend the Bush-era capital gains tax rate of 15% through the end of 2012. This gave small business owners two more years to receive a greater takeaway from their business sale and based on recent trends, many did take advantage. Small business transactions have slowly increased over the past two years, according to BizBuySell.com data, and while there are certainly other factors involved, the lower capital gains rate was likely part of the reason.
With Obama's re-election Tuesday, that 15% rate is likely to continue with one important difference. While the President has repeatedly proposed extending the Bush-era tax rate to those who report under $250,000 in income, earners who make more will most likely revert to the old rate of 20%.
The hope is that this will keep the tax burden off of smaller business owners as the wealthy pay a greater share of taxes, similar to the rate which they paid during the Clinton Administration.
Another issue getting less attention at the moment is the additional 3.8 percentage point tax increase included in the Affordable Care Act (Obamacare).
The 3.8% Obamcare tax will be applied to investment income over $250,000. For many, this could bump their effective capital gains rate to 23.8% in 2013, meaning a seller of a business with a capital gain of $100,000 will pay almost $9,000 more in taxes, and take home that much less after the business sale.
The ongoing new costs related to Obamacare could hurt small business owners as well. The law stipulates that businesses with more than 50 employees will be required to provide affordable healthcare coverage to full-time employees. With President Obama's re-election, this requirement is likely here to stay. The declining profits resulting from increased small business healthcare expenses will likely lead to lower selling prices for small businesses (which usually trade based on a multiple of cash flow or profit).
The Fiscal Cliff
The other big issue that may impact small business valuations is the "Fiscal Cliff" looming at the end of 2012. As part of the debt ceiling deal reached last summer, Congress scheduled a series of massive spending cuts, set to be enacted at the New Year if President Obama and Congress can't agree on a revised budget and limits to deficit spending.
President Obama's re-election ensured any Democratic solution to the Fiscal Cliff deal will include tax increases on the wealthy. The House of Representatives has categorically rejected any new revenue in dealing with the deficit.
If no deal is reached, resulting tax increases and spending cuts, while originally meant to reduce the deficit, may instead result in an even deeper economic recession. With many small businesses still struggling to survive and unwilling to accept current valuation prices in a sale, another economic drop could be a devastating blow. Small business transactions would likely slip as owners refuse to drop their asking price and prospective buyers struggle to find financially strong businesses on the market.
President Obama has repeatedly said that he is confident a deficit deal can be reached before the so-called cliff is reached. With his re-election, small business owners will be keeping a close eye on how he works with Congress over the next two months and if the two political sides can compromise on a mutually beneficial deal.
Small Business Lending
The last element that bodes well for the small business transition market is that President Obama has pledged to help increase lending and financing opportunities for entrepreneurs and small business owners. While the President was successful in pushing through the Small Business Jobs Act of 2010 during his first term, many small business owners claimed not to have seen the benefits in terms of capital available for them and potential business buyers. Small business owners will be hoping for more direct benefits from small business lending and increased capital during Obama's second term.
Undoubtedly, President Obama's re-election will have a significant impact, one way or the other, on the small business economy, and on an owner's ability to successfully sell their business. We have seen a slow but steady improvement in the business-for-sale market over the past few years and owners will now look to a re-elected and re-energized President Obama to continue that trend with his second-term agenda.