Selling on Cap Gains Tax Speculation

“Capital gains taxes are going up no matter who gets elected president, or what party they’re from. That’s just how it’s going to be.”

Those were the words back in January of one of this space’s better sources – an ardent Republican who had not yet decided who to support in his state’s GOP primary. Our conversation was more about politics than business, but his point is beginning to significantly impact the private equity markets. Specifically, lots of people are looking to sell their businesses now rather than in 2008 or 2009, in order to avoid paying what they believe will be higher capital gains rates.

This philosophy is most prominently felt in the small-cap and mid-cap buyouts spaces, particularly when it comes to buying family-owned businesses. It’s also having an impact among VC-backed entrepreneurs.

It seems to be counterintuitive, given that company values are depressed across the board. Apparently the calculation is that the value lost by selling today is less than the return lost by paying on a higher capital gains rate in 2009 or 2010. This is particularly true among those who aren’t expecting an economic rebound anytime soon.

Interest argument to watch develop, particularly as investment bankers promote it to attract new clients…