Inc. online reports that many small business owners want to sell their companies before the end of 2012. What’s more, there is a lot of interest in buying companies. One major reason for the selling interest is that capital gains taxes are set to rise by five percentage points, from the current 15% to 20% on the profit on the sale. If you get $5million for your company, most of that will likely be capital gains, so you would pay an extra $250,000. That’s a lot of cash, but if you haven’t prepared your company for the sale, it’s a pittance compared to what you might be leaving on the table.
Buying interest rises when there is good reason to believe companies are selling at a discount to their real worth. Owners who rush to the exit because the tax man cometh may be letting the rush take their mind off the critical step of improving their company’s valuation. It takes some time of focusing on valuation to bring a company to the point that its sale price may reflect the true wealth stored up in the company.
A key factor in valuing any company is the vulnerability of a company’s revenue to competitive forces, the barrier to entry for competitors. The higher the barrier, the more likely the company will be able to defend its market share. And that barrier is raised when the owner takes legal proper steps to protect the ideas that form the basis of the company’s competitive advantage.
Think of the ideas in your company as property. What if any other company in your industry could use your property for its own benefit. If that thought scares you, imagine what it does to the price someone would pay you to buy your company. Unprotected ideas are fair game for anybody to use. But there are four type of idea protection recognized by the government: Trade secret, trademark, copyright, and patent. If you take advantage of one or more of these legal protection methods for your key ideas, the government and the courts will help you keep those ideas out of the hands of your competitors.
So before you hurry to sell your company to avoid a possible 5% increase in taxes, make sure you have taken every step possible to protect all the ideas inside your company that form the basis of your competitive advantage. Those steps stand to increase the value of your company by substantially more than the additional 5% the taxman may want from you.
Argent Place Advisors serves small business owners as a trusted advisor on business and legal ways to improve their company’s value.