There are many consequences of the 2018 Tax Act, especially for M&A. Perhaps the most evident affects of the new law are the following:
- With the reduced rate for C corps from 35 to 21%, after-tax cash flow will increase. Since most transactions are initially priced as a multiple times EBITDA (before tax income), on the surface this tax reduction will not affect the EBITDA portion of the formula. However, we are already seeing an uptick is buyer proposed multiples. This is especially relevant if the C corp will remain intact as an entity after the purchase.
- For C corps where the primary shareholder/owner(s) is a significant part of the brand and business success, an important tax strategy is to value this resultant personal goodwill apart from the business goodwill. The personal goodwill is not subject to the double taxation since the amount drops to the shareholder level at a capital gains rate.
- Buyers are more driven than ever to purchase assets, not stock. The tax allocation of purchase price to acquired assets creates an immediate benefit under the 100% bonus depreciation rule. Thus, the full amount of used personal property may be expensed in year one. In analyzing the business value, this immediate expensing should be balanced against near term projected capital expenditures.
- For certain pass-through entities, the value may be enhanced in 2018. The added 20% deduction to net income saves taxes and could be considered a positive adjustment to cash flow.