Seller’s Market and Preferred Tax Treatments Make This the Time to Explore Your Options

This spring, President Joe Biden rolled out his plans to improve the country’s infrastructure, implement new programs like paid family and medical leave and extend several individual tax credits to assist American families. To pay for these plans, his administration has proposed changes to the tax code, including an increase in both the corporate and capital gains tax rates.

If you’re a home health, home care, hospice or behavioral health company owner who has been thinking about a future exit strategy, you may be wondering how these proposed tax changes could affect the sale of your business. According to Stoneridge Partners’ President and CEO Rich Tinsley, JD, CPA, the possibility of tax law changes in the near future combined with the current state of the market make now the perfect time to seriously evaluate your options.

“The proposal essentially doubles the top federal tax rate on capital gains over $1 million, which could have a significant impact on sellers in the future,” said Tinsley. “Not only will it reduce how much an owner gets to keep after they leave the closing table, but it could give buyers more negotiating strength and have an effect on valuations.”

Biden’s current proposal increases capital gains taxes from 20% to 39.6% after the first $1 million. The chart below shows how that increase could impact the amount of tax sellers would pay after a successful transaction.

Purchase Price $1,000,000 $5,000,000 $10,000,000 $15,000,000 $20,000,000
Current Capital Gains Tax* $200,000 $1,000,000 $2,000,000 $3,000,000 $4,000,000
Proposed Capital Gains Tax* $200,000 $1,800,000 $3,800,000 $5,800,000 $7,800,000
Additional Tax Paid $ – $800,000 $1,800,000 $2,800,000 $3,800,000
Percentage Tax Increase 80% 90% 93% 95%

* Does not include any state capital gains taxes

Congress must approve the proposed tax overhauls, but Tinsley believes sellers who wait for Congress to act before making any decisions about whether to enter the market will put themselves in an unenviable position.

“Complex transactions like these take a lot of time and effort, and there’s always a risk that the sale won’t be completed before tax law changes go into effect,” he said. “That means buyers can exert more negotiating power, because they know sellers are anxious to exit before a certain deadline. Plus, if a large number of sellers enter the market at once after Congress officially passes any changes, that may drive valuations down.”

Instead, Tinsley says conditions in today’s market are much more likely to yield positive results for sellers.

“We’re in a seller’s market right now – we’re seeing fantastic valuations across all segments, and we still have the benefit of preferred capital gains tax treatment. But there’s no guarantee how long that will remain the case.”

If you think it may be the right time to put your home care, home health, hospice or behavioral health company on the market, talk to the expert advisors at Stoneridge Partners. They have decades of experience working as home health and post-acute care operators and business development professionals, so they understand the questions you have about your company’s future. Their industry contacts and market expertise will help you get results.

Reach the team at Stoneridge by phone at (800) 218-3944, by email at partners@stoneridgepartners.com, or just fill out the form below and an advisor will get back to you as soon as possible.