Wednesday, April 9, 2008

Is This A Good Time To Sell?

The National Political Scene and Taxes
Barron's Speaking of Dividends column ( Dec. 31, 2007) should serve as a wake up call to all business owners with regard to tax policy after the next election cycle. Even if the GOP wins the White House, a Republican president will probably be dealing with a Democratic Congress. The more likely scenario is an all Democratic government. Under current law, it would take an act of Congress to keep the dividend tax rate at 15% otherwise it will return to 39.6% in 2011. It is possible that Democrats will decide to keep the dividend and capital-gains rate equal to each other, which would imply that both would increase to as low as 25% but more likely 28%, nearly double the current 15% rate.

Interest Rates and Inflation
Maintaining a lid on inflation continue to be a central focus of the Federal Reserve. Bench mark interest rates have decreased, credit appears to be tightening, but borrowing rates for acquisitions of successful businesses remain low. However, with a continued strong economy, the cost of borrowing is likely to increase. Other things being equal, "value" and interest rates work inversely to each other-as rates move higher, value moves lower.

Private Equity Groups
Demand for business acquisitions from all sectors-high net worth individuals, corporations, and private equity groups-all remain strong. Private equity groups in particular have been an aggressive force in acquiring middle-market transactions--we have managed transactions to equity groups where the purchase prices have been as little as $5 million. These groups have money and need to utilize these funds. We are just learning about some of the advantageous tax rates utilized by these groups. The tax loophole of capital gains treatment for management fees are likely to be eliminated. Further, if investments by equity groups fail, and some will, demand from these groups may taper off.