Determining Your Business Multiple

Matteo Valles

by Matteo Valles · Updated Oct. 23, 2020

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Today I'm going to show you how Biden's proposed tax changes to capital gains will effect your proceeds from selling your business.


In fact, I'll show an example where you might retain 17.5% LESS in proceeds.

Here's the list of topics covered in this article:

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Asset vs. Stock Sale

Pros and Cons to the Buyer and Seller

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Valuing Your Business

Determine Earnings and Multiple

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Tax Consequences

Potential Decrease in Net Income

1. Proposed Tax Changes

With the 2020 election just days away and Biden leading in the polls, his tax plan is getting more and more attention.


If you are a business owner looking to retire in the near future, you need to pay attention to one specific aspect of his tax plan and how it may affect you:


Raising the capital gains tax from 23.8% (capital gains plus an additional 3.8% tax on net investment income) to 39.6% on income over $1,000,000.


Your business is likely your most valuable asset and your retirement depends on the proceeds you receive from selling the business. As a East Tennessee business broker, I’ve overseen many transactions and will explain the overarching principles when selling you business, but you’ll want to talk with your CPA about specifics in your situation.

You'll need to understand 2 key factors to determine how the tax code change will effect you: the value of your business and the structure of the sale.

2. Valuing Your Business


The first thing you need to determine is if this tax code change would even affect you. You will only need to worry about this tax increase if the combination of all money you have earned in a year plus the proceeds from the sale of your business is greater than $1,000,000.


While you may have a good idea of what you expect to make in a given year, how much you could sell your business for might be unknown to you.


Most small businesses are valued by determining the total income the owner makes in an average year and multiplying it by the related industry multiple. Both of these numbers aren’t necessarily straightforward to arrive at though.


An in-depth article about determining owner income can be found here, but the key steps are to add up your net profit, any wages you took, non-cash expenses, and any other personal benefits (health insurance, life insurance, personal cars, etc).


Determining your business multiple will also vary depending on the industry, your role in the business, historic stability, and more.


This process is complex and needs a professional, but if you want a quick ballpark estimate that you can do yourself, I recommend going to and looking at listings that are similar to your business. While it won’t be perfect, it’ll give you an idea of where you’re at.

3. Asset vs. Stock Sale


It is also important to understand the difference between two types of business sales: asset and stock sales.


While there are pros and cons for both the buyer and seller in terms of risk, legal structure, and price allocation, the aspect we’ll focus on here is the tax implications of both.


Asset vs. Stock Sale, Which is Right for Your Business? offers a more detailed explanation of the difference between the two.


The key difference in terms of tax implications:

  • Asset sale - A portion of the sale is ordinary income and the rest is capital gains

  • Stock sale - The entire sale is treated as capital gains


Thus a stock sale is almost always advantageous for the seller based on taxes.


Here's why asset sales have ordinary income and capital gains...

An asset sale treats all the assets separately and the purchase price needs to be allocated between them and agreed upon by the buyer and seller.


This includes categories such as accounts receivable, inventory, equipment, real estate, goodwill, a non-compete, and more.


The realized gain on each category will have different tax consequences for the buyer and the seller which can create price allocation tension between the parties.


You, as the seller, want as much allocated to items that produce capital gains, whereas the buyer will want categories that produce ordinary income for you because those items can usually be depreciated quicker.


Whereas a stock sale sells the company, not it's separate assets.

A stock sale is treated the same as when you sell stock on the NYSE. If you’ve held the stock (owned the company) for over a year, all proceeds from the sale will qualify for capital gains treatment.


The only difference is that determining your tax basis on public stock is very simple, whereas, it can be much more complicated to determine your tax basis for your business. You will want to consult a CPA to determine this.


Since Biden’s tax plan is targeted at capital gains, it will have the greatest effect of stock sales as the entire amount is capital gains.

Let's look at some examples of how this may play out...

4. Tax Consequences


Below are potential after-tax situations comparing today’s tax code and Biden’s proposed tax code.


The after-tax columns show the after-tax income of the combined owner earnings and business sale. For simplicity, all the below examples will be treated as stock sales, with a tax basis of $0, sold at the end of the year, and owner earnings taxed at 30%.

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Most likely, you will have strategies in place to reduce your tax liability more than what is shown in the table above, but the table shows that your net after-tax income of selling your business could be greatly reduced under the proposed tax plan.


In the example above of the owner making $750,000, they would have to sell their business for $3,720,000 to break even with today’s current tax code. That’s a 24% increase!


If a new tax plan is implemented, many business owners may be in a rush to sell before the tax code goes into effect or have to work a few years longer.

While the election has not been held yet and there’s no telling what kind of tax plan would actually be passed, it is important to understand the potential outcomes and start thinking about what actions you would take.


If you’ve been thinking about selling in the near future, it will be worth having those conversations with your CPA today.



Note from the author:

I am a Business Broker/M&A Advisor in the East Tennessee, however, I am not a CPA nor do I have knowledge about your specific financial situation. All numbers were given solely for example and your situation may vary greatly. I recommend you work with your CPA to determine the best path for you.

Still have questions? Email me at


I’m happy to help anytime.

Thank you to Icon Scout for several of the illustrations: 1, 2, 3, 4, 5