Tax Reform’s Impact on Mergers & Acquisitions

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While it’s too soon to tell if the goals set forth by the Tax Cuts and Jobs Act of 2017 (TCJA) will be met, we do know that the legislation contains several provisions that have the potential to significantly boost capital investments in the middle market and increase deal flow across the United States. It is important to know the impacts of the new tax provisions so that you can adjust strategies and reduce tax burdens, as well as begin (or continue) careful thought around your eventual succession plan — whether you’re considering a transition at this time or not.

The TCJA significantly lowered tax rates on corporations as well as owners of some pass-through entities. Most notably, the TCJA replaced the country’s graduated corporate rate structure, with a top tax rate of 35%, with a flat tax of 21%. Lower taxes can be a deciding factor in merger considerations, and we expect the reduction in taxes will pique interest in U.S. companies. (It’s worth noting that U.S.-domiciled companies were already receiving increased attention from global buyers because of the steady United States economy. Between 2008 and 2012, foreign buyers closed an average of 1,333 purchases of U.S. companies per year; that number grew to an average of 1,778 deals per year between 2013 and 2017, according to a recent report released by Deloitte.)

But foreign buyers won’t be the only ones interested in the M&A market. U.S. multinational corporations are now bringing more cash home — an estimated $1.5 to $2 trillion — as a result of the TCJA’s mandate of a one-time repatriation of previously deferred overseas profits. This will make for some stiff competition and potentially lucrative sales for privately owned companies. Another recent survey by Deloitte of nearly 1,900 global private companies concludes that cross-border merger activity is poised to rise in the months ahead. More than 40% executives polled said they expect their company to make an acquisition this year seeking the opportunity to enter new global markets and expand and diversify their customer base.

Here are a few other important factors that could impact the M&A market:

  • The TCJA provides an immediate bonus deduction for 100% of the cost of qualifying assets for through 2022, and the deduction is available for both new property and property acquired from a different taxpayer. In other words, property acquired through an acquisition now qualifies. Certain asset-intensive sectors could be big winners — pharma, manufacturing, construction, and others that hold and/or produce qualified property. 
  • For transactions with significant intangible value, the reduction in the corporate rate to 21% percent may mean that the tax impacts of an asset acquisition are not quite as valuable as when the tax rate topped 35%. This is because the tax value of intangible amortization (generally over 15 years) has a lower cash flow impact. Of course, acquirers may still prefer the legal protections with an asset acquisition over a stock purchase. 
  • The TCJA provides beneficial deductions to certain pass-throughs including a deduction of up to 20% of their business income. However, pass-throughs that fall into a “specified service trades or businesses” such as health, law, consulting, athletics, financial services, and brokerage services won’t qualify for the deduction if the taxpayer’s taxable income is more than $207,500 ($415,000 for married individuals filing jointly).

What does all of this mean you as the owner of a private company in the U.S.? It means that now is the time to prepare for increased interest in your business. You may not have thought about transitioning at this time, but this unique environment means you should be “M&A ready” — with a clear strategy, an optimally organized business and tax structure, and superior reporting and governance.

In other words, succession planning just moved to the top of your to-do list.

Earlier this year, we partnered with several leading area firms who specialize in succession planning and developed an exit planning survey to determine business owners’ feelings of overall preparedness in exiting their companies. Those results are now available below and reveal the challenges business owners face in succession planning. It’s a great thought piece, and we encourage you to read and share it.

2018 Exit Planning Survey Results (162 downloads)

 

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