An Increase in Startup Exits in the Second Half of 2012

With the second half of 2012 less than a month away there’s speculation that we’ll see an increase in startup exits right up until December 31, 2012. Why? Taxes. That’s right, the tax rate for long term capital gains in the United States is expected to rise from 15% to 23.8% with the expiration of the Bush tax rates and the advent of the Obamacare tax increases.

How does an increase of long term capital gains from 15% to 23.8% play out for entrepreneurs that do or don’t sell? Here are some example scenarios:

  • Own 20% of a company that sells for $10M for a payout of $2M:
    15% of $2M = $300,000
    23.8% of $2M = $476,000
  • Own 20% of a company that sells for $30M for a payout of $6M:
    15% of $6M = $900,000
    23.8% of $6M = $1,428,000
  • Own 20% of a company that sells for $100M for a payout of $20M:
    15% of $20M = $3,000,000
    23.8% of  $20M = $4,760,000

Of course, the potential acquirers are going to know this as well and take it into account when negotiating, so it isn’t all benefit for the entrepreneurs. Potential acquirers, taking taxes into account, will offer requisitely lower prices knowing there’s a hard and fast deadline. Most deals are emotionally driven and not as rational as you’d think, making taxes even less of any issue, but they’ll still be an issue for the entrepreneurs.

What else? Do you think there will be an increase in startup exits in the second half of 2012?

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