If life at the beach has been calling your name, you want to spend more time with family, or you’re just ready to take it easy, retirement has probably seemed more and more appealing as the days go by.
Yet, more often than not, many business owners are hesitant to sell the payroll business they’ve worked so hard to build, prolonging the process as they continue to ask themselves: “Is now really the right time?”
This hesitancy is also amplified during periods of uncertainty and change, and as a transition in power takes place in Washington, many business owners are wondering what the future landscape means for their retirement plans. While some are excited to see change, others are worried that the Biden administration will make it harder to retire in the next few years.
To alleviate some of your uncertainty, let’s break down what’s in store:
Increased Regulation
With a single party in control of Congress, the payroll industry will face heightened regulations at both the state and federal levels. These will likely include:
- Money Transmitter Regulations – While money transmitter regulations have been in place at the state level for payment processing, this is expected to expand overall payroll-related transmissions in the upcoming years.
- Fraud Prevention Regulations – After one too many delinquent entities posed as legitimate payroll providers, more regulators are requesting stringent protections and control over the industry to decrease threats of fraud.
- Climate Change Policies – As the Biden administration tightens policies to address climate issues, this will demand significant adjustments that will take many years for business owners to adapt to.
State by state regulations will impose administrative changes that will affect small payroll bureaus over big-box payroll providers. As a result, small business costs are only expected to increase as the larger payroll companies continue to dominate the market.
Inflation and Tax
While the Biden administration introduced a $1.9 trillion COVID-relief package to address the current economic downturn, additional stimulus is driving taxes higher. Likewise, the unemployment cost for small businesses is also expected to rise as the administration works to bolster state programs that were decimated over the past year.
Beyond COVID-related relief, Biden is also promising to increase the federal minimum wage from $7.25 an hour to $15.00 an hour, a change that will favor employees but narrow margins for small business owners, leading many operations to raise the cost of their offerings.
Long-Term Capital Gains and Estate Tax
Beyond income taxes, under Biden’s American Families Plan, long-term capital gains taxes will increase from 20 percent to 39.6 percent in 2022, a hike that will also affect smaller payroll practices over large ones. Section 1202 of the IRS Code – which allows investments in Qualified Small Business Stock (QSBS) of C corporations – will exclude 100 percent of the capital gains made on investments held for at least 5 years. However, this provision is rarely available for S corporations or LLCs, meaning that small business buyers will not be able to reap benefits from Section 1202. In return, sellers will experience a significant reduction in their net proceeds and will lack leverage over purchasers, creating a buyers’ market.
Biden has also proposed to bump estate and gift taxes while slashing the lifetime exclusion amount. Increasing taxation for the wealthy is currently politically in vogue, but the definition of “wealthy” is still very open to interpretation. However, the long-term impact is clear: for sellers wishing to retire and pass their gains along to future generations, the tax man may get a larger share.
The Bottom Line
So, will the Biden administration make it harder for you to retire? The answer is most likely yes.
While the changes outlined above are not set in stone, sellers are expected to face challenges in the next few years. On average, business valuations are negatively impacted by tax and regulation increases and the sellers’ market we’ve been experiencing for the past decade is overdue to flip, further depressing value. However, since most of these changes will not go into effect before the end of 2021, you still have a narrow window to get your retirement plan in order now.
As you do so, keep in mind these tips to extract the most value out of your business:
- Look for qualified tax advice based on your individual business and personal situation – not just the industry standard.
- Explore your options and consider either an early exit or a 5-year strategy.
- Build a “buyer ready” business now to take advantage of the pending full recovery and continued sellers’ market down the line.
- And remember – buyers are buying your company’s future, NOT your company’s past.
If you’re ready to talk exit strategy, take the first steps and schedule a business valuation and consultation. We’ll set a plan into place that works for you and your business.
