Timing is everything when it comes to selling your firm. You need to feel ready to relinquish ownership. Your willingness to exit – and, ultimately, your firm’s valuation – is dependent on a myriad of factors contingent on timing.

President Joe Biden’s capital gains proposal is injecting a new dynamic into the conversation. To fund his American Families Plan, Biden’s proposed capital gains tax rate increase – to 39.6% from 20% – targets investors who make more than $1 million. The change would also affect advisors eyeing a sale.

The timing of passage is uncertain, as Biden proposed the increase before Congress in April. What role should that proposal, if passed, play in decision-making? Let’s examine it alongside two other factors.

Whether you’re planning to sell near-term or in several years, protecting your clients, team and legacy requires more than the right buyer and valuation. You need to account for your current and future competitive positioning, the market dynamics driving deals and valuation, and exogenous factors such as regulatory or legislative changes (like a capital gains tax increase) that could impact your sale.

Can You Compete Moving Forward?

Competitiveness is the first angle you need to approach a potential sale from. Are you and your firm positioned to compete going forward? This applies to competing for both clients and talent. Will you have the technology and skillset to serve clients a best-in-class experience, not just today, but well into the future? Have you set up your team for success? Do you have the ability to develop and retain future team members?

To be blunt, if you’re not growing, you’re dying. Are you willing to spend the money and resources to continue growing three to five years into the future at the same or a faster pace and level than you are today? If not, you might want to consider selling sooner rather than later because it’s not far-fetched to think that your firm will never be as valuable as it is today.

Are Market Conditions Favorable?

Consider the state of the market. Market conditions can create a favorable or unfavorable environment for advisors looking to sell. For example, the law of supply and demand has been palpable as we’ve seen valuations tick up as more buyers have entered the market. Additionally, the interest rate environment we’ve been in has aided the available capital in the market and therefore has also contributed to the increase in valuations.

As with all seasons, these conditions will inevitably change. Take into account how long the market has been this way and what upcoming changes might affect it. Don’t wait until it’s too late to act.

That being said, the process of selling your firm is typically a six- to nine-month-long process. While there’s a sense of urgency if you want to capitalize on the current market, urgency doesn’t trump process.

Can You Offset Potential Capital Gains Tax Rate Increase?

The potential capital gains tax rate increase adds to advisors’ sense of urgency.

Question marks surround the proposal. The increase isn’t so much a matter of “if” but “how much.” (Right now, the new magic number is 39.6%, up from 20%.) Regardless of the jump, it could create millions in lost income.

And beyond that, it’s possible the increase will be retroactive. Even so, the change creates a deadline in the minds of advisors peeking over the edge of a sale.

Heed the process. If you’re seriously considering a sale and you want to avoid the possibility of the capital gains tax increase, you should consider taking action now. It takes months to find a buyer who’s the right fit and complete the due diligence necessary to close the deal before December 31.

If you’re not looking to beat the end-of-year deadline, but are still looking to sell sometime in the future, the capital gains tax rate increase will still factor into your decision. If you can’t outright avoid the tax rate increase, you should try to make up for the lost income. Calculate your potential lost proceeds and then the amount you’ll need to grow to break even. You may be looking at 3-5 years just to break even based on the Biden proposal.

Related content: 4 Steps to Choosing the Right Succession Plan (Webinar)

Another way to hedge some of the risk of a potential tax rate increase would be to sell part of your business today. A minority  partner would hold a non-controlling stake in your business. This is ideal if you want to capitalize on favorable market conditions but aren’t ready to completely exit or give up control – or don’t have time to sell by year end.

Carson Group has worked out 10 minority investments with firms and intends to make more. The offering allows advisors to retain control and ownership of their firm while gaining access to resources and team members that will help them grow. It removes the urgency of trying to find a buyer on their own or selling to a large entity, allows them to take some chips off the table today, and gives them the freedom and control to grow how they want in eventually taking the second bite of the apple down the road.

Take into account all three factors: current and long-term competitive positioning, conditions of the market, and exogenous factors such as a capital gains tax rate increase. Ask yourself:

  • Is it worth waiting?
  • Do the factors stack up in your favor now?
  • Do you have the drive to make up for potential lost income?
  • Do you have the resources and team to continue providing value for the next three to five years and beyond?
  • Are market conditions favorable, or will they change soon?

Exiting or selling your firm involves many factors, but timing is at the core. Is now the right time? Consider all angles of a sale before taking action.

Need help sifting through those questions? Unsure of how these factors play out in your firm?

Schedule a consultation with Chris Page, Carson Vice President of Mergers & Acquisitions.

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