Thursday, June 5, 2003

Federal tax changes will likely have many small-business owners thinking now’s the time to sell.

The laws enacted last week reduced the capital gains tax bite on profit from the sale of a business by 25 percent. They also help buyers extract more after-tax cash from operations, which should raise what they will be willing to pay.

But an over fondness for tax loopholes could snarl would-be sellers, warm Stan Feldman and Roger Winsby, founders of Axiom Valuation Solutions in Lowell and authors of "What Ever Business Owner Should Know About Valuating Their Business"

"There are lots of ways that people reduce their taxes by minimizing what they have to report as taxable income," says Winsby. "But when they want to sell, that understated their income and how much the business is really worth."

Feldman and Winsby estimate billions of dollars in profits from business sales may be lost because of this, as successful baby boom entrepreneurs start to cash out.

Only about 5 percent of business tax returns he’s seen are "reasonably transparent," Winsby says, meaning 95 percent don’t accurately portray profits.

And there are no overnight fixes, the Axiom Valuation partners say.

"Owners need to start documenting the value of the business several years before they sell if they are going to get a fair price," says Feldman, who is an associate finance professor at Bentley College.

Waiting to sell may also hurt, says Winsby.

"We expect the number of businesses being offered for sale to quadruple by 2005 and stay at that level for a number of years," he says. "You’re going to get more for a good business now than you will when that transitional tidal wave hits and everybody else is trying to sell, too."

So what kinds of businesses are most attractive to buyers now?

"Those that are simple to understand and generate a lot of cash flow", says Feldman

Light manufacturers and distributorships are at the top of the list.

"We’re not talking sexy here," Feldman says. "Something like a printing business or a car wash is ideal."

Things the tax changes haven’t altered is the complexity of doing a sale or the $5,000 to $25,000 it costs to get a professional valuation appraisal, Feldman and Winsby warn.

Their firm, Axiom Valuation, grew out of a company they started in 2001 - BizownerHQ.com - which offered inexpensive online valuations.

"People can still do that, but we found when it came time to sell, owners were much more willing to pay us to do a full valuation," Winsby says.

"When it comes down to it, people still want to know what they can expect people to pay for and how much," Feldman says.