Impact on Lower-Middle Market
Business Owners
The last couple of years have been difficult for business owners and financing markets, to say the least. Limited credit,
economic uncertainty among businesses and consumers, and poor financial performance across industry sectors
contributed to curtailed growth prospects, and have some wondering what their long-term strategy might entail. As we head
into 2010, however, there are many reasons for optimism that merger and acquisition activity will increase, including
improving economic indicators, cash heavy balance sheets of strategic
buyers, better than expected fund raising by private equity groups and
increased confidence in the private and public sectors. For potential
sellers, 2010 is also an important time to consider valuation risks now
versus future years due to the scheduled increase in the capital gains
tax rate in 2011.
Originally signed into law in 2001, the capital gains tax rate was
reduced as part of President Bush’s Economic Growth and Tax Relief
Reconciliation Act. Under the reduced rate, long-term capital gains
and qualified dividends were taxed at 15% for the lowest two income
tax brackets. The lowered rate was set to expire in 2008; however, the
reduced rate was extended in 2006 under Bush’s Tax Reconciliation Act
and is scheduled to expire at the end of 2010, at which time the rate will revert to the 2003 rates, which were 20%.
Given the capital gains tax rate increase represents a 33.33% higher effective tax rate, there is significant motivation for
owners and shareholders already considering a potential sale in the near-term to consider action in 2010. Beyond avoiding
a higher tax rate on long-term capital gains, sellers also need to carefully plan the timing of a potential exit in 2010 in order
to secure the most attractive buyer and preserve leverage in the negotiations of the purchase agreement.
Capital Gains Increase
1776 I Street NW, 9th Floor • Washington, D.C. 20006 • 202-661-4691 • www.wyattmatas.com
Mergers & Ac