Private business owners consider exit ahead of possible U.S. tax hike

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Melissa Karsh, Michelle F. Davis and Devon Pendleton

For 110 years, four generations of the Mills family have made their money growing their great-grandfather’s Chicago apron business into a medical supplier ranked among the nation’s largest private companies.

But soon after Democrats turned to raising taxes for the rich this year, the family signed a deal to cash in billions.

It was no coincidence, according to people familiar with the more than $ 30 billion deal, which sold part of Medline Industries Inc. to a consortium of Wall Street investors in the largest buyout of lever of the health sector. The threat of subjecting billions of products to additional capital gains taxes motivated the clan to do so before the end of 2021, when higher rates could kick in, people said.

Such maneuvers are suddenly in the works in the opaque world of US private corporations, as the founders and their descendants quietly consult tax professionals and bankers with a pointed question: How much could they save by selling quickly?

Suddenly, in just a few short months, the vast negotiating machinery that caters to wealthy entrepreneurs began to buzz with a level of activity that some industry veterans say they have never seen before, potentially creating a cascade of sales for Later this year. A combination of high corporate valuations and potentially higher taxes going forward is proving to be a strong motivator.

A spokesperson for the Mills family did not respond to messages seeking comment on the role of taxes in the deal – a motive that had never been reported before. Earlier this month, the Chicago Tribune quoted Medline President Andy Mills as saying the goal of the sale was to strengthen the business while freeing up money for family members whose valued net was linked to it. About 20 to 30 of them will benefit.

The family could be worth around $ 30 billion, according to the Bloomberg Billionaires Index.

Many scenes take place far beyond the golden towers of Wall Street: In a former brick-roofed supply building in Birmingham, Alabama, executives of mergers and acquisitions firm Founders Advisors move into a space of newly expanded office and end a wave of early hiring to increase staff 50%. They recruit millionaire business owners, eager to begin the process of selling at least some of what they’ve built.

“It’s been the fastest growing market ever since we’ve been in business,” said CEO Duane Donner. More than half of its customers come from neighboring states and Texas, where the company has two outposts. “We have more commitments than we have ever had.” Reason # 1, he said: “taxes”.

In the Midwest, the co-founder of an online marketing company is giving up his dream of taking a less active role and letting the business continue to grow in the years to come under the leadership of the next generation. Now selling just makes more financial sense, he said, speaking on condition that his business was not identified. He and his partners are preparing their exit.

The founders are not the only owners who are under pressure. In Manhattan, Boston and other centers of the private equity world, senior executives are discussing with companies in their portfolios the possibility of reducing or selling stakes this year to reduce taxes payable and maximize returns, executives and their advisers said in interviews. They are also looking for opportunities to buy businesses that could be put up for sale due to tax changes. Business owners would do well to get out now, noted a private equity executive, because by this fall in the United States there will be too many sellers in the market.

“It’s clear from a seller’s perspective – whether family or private – that there is a growing debate,” said Rick Landgarten, global head of healthcare and real estate consulting teams at Barclays. , in an interview. They ask “Can I finish this year?” Because I expect tax rate increases later this year or early next year. ‘”

The irony is that Democrats haven’t even come together around a plan yet.

President Joe Biden has proposed increasing the capital gains tax rate from 20% to 39.6% for those earning $ 1 million or more. But such a measure will almost certainly have to face months of negotiation before it can be passed. More than 20 Democrats in the high-tax States House have threatened to reject Biden’s tax plans unless they also address the so-called SALT cap imposed under President Donald Trump. And recently, a new debate erupted among Democrats over whether to also demand an even more controversial wealth tax.

Meanwhile, business owners are hungry for certainty – urging tax experts, bankers, and even their representatives in Congress to specify by how much tax bills will rise if they wait to sell. Many fear the Democrats will thwart such an evasion anyway, by making any capital gains tax increases retroactive. Biden’s proposal assumes the increase would be retroactive to the end of April, when it was proposed. But it’s unclear whether Congress would approve such a measure.

“Frankly, just the volatility of the tax discussion – what will happen, when will it happen, if it will be retroactive – makes it hard to steer the boat when you don’t know exactly what each of these entrepreneurs should do and how they should plan, ”said Brad Bernstein, managing partner of private equity firm FTV Capital, which specializes in working with founders of fintech companies.

Some are alternative floating tax strategies.

Private equity funds could, for example, decide to go public with portfolio companies and then ask general partners to collect their performance fee, known as carry, in shares, Bernstein said. This would defer capital gains and income taxes until they sell their shares.

Another approach for business owners is to trigger a tax bill this year, such as moving abroad and renouncing U.S. citizenship or engaging in other transfers that constitute a deemed sale, a said David Lesperance, international tax and immigration advisor at Lesperance & Associates. The idea is to pay taxes before rates go up, giving homeowners more time to organize a sale on optimal terms.

Of course, there are many factors that contribute to talking about agreements. The stock market is near an all-time high, causing the valuations of private companies to soar. Buyout companies are loaded with dry powder for buyouts after the pandemic. Blank check companies known as PSPC, which took to the stock market last year, are under pressure to find desirable buyout targets.

Low interest rates also make it easier for companies to finance strategic acquisitions. And investor interest in IPOs remains strong, forcing private equity firms to shed their holdings before they soften. About 65% of private equity executives polled by EY in February and March expect tax policy changes to have an impact on when they exit.

“We have seen a strong resurgence in exit activity overall,” said Pete Witte, EY’s chief global private equity analyst, in an interview. “As we move into the rest of the year, the tax share will be particularly important here as well.”


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