The U.S. Tax Cuts and Jobs Act is some of the most significant tax reform legislation in years, and is expected to lower federal tax rates for businesses, and provide several new deductions for both C-Corporations as well as pass-through entities, including LLCs and S-Corps. Coupled with a strong economy and high business owner confidence, all signs indicate that the new tax law will have a positive impact on business values and business sales for the foreseeable future. Owners who are thinking about transitioning out of their businesses should take advantage of these favorable conditions.
How Business Owners Plan to Use Tax Savings
BizBuySell surveyed 1,100 small business owners and asked their opinion on Trump’s tax plan, whether or not they expect to benefit, and if so, how they plan to use their tax savings. It indicates that owners plan to invest in their businesses by increasing salaries and staffing, investing in marketing, and making capital improvements to the business, all of which should have a positive impact on value. Here is how the respondents said they will use the majority of their tax savings:
- 32% will invest in marketing and sales initiatives
- 21% will invest in physical improvements
- 13% will hire new employees, and
- 12% will spend it on their current employees
Business Sales Have Reached Record Highs with No Foreseeable Slowdown
As we discussed in a recent article: 2017 was a strong year for the mergers and acquisitions market, and “2018 is the most active year for deal-making on record, according to data from Bloomberg, with nearly $1.7 trillion worth of deals announced year-to-date across the globe. That pace puts the market on track for $5 trillion in deals, which would blow away pre-financial crisis highs when mergers topped $4.6 trillion in value in 2007.”
Business Owners Remain Highly Optimistic
Confidence among small business owners appears to be high as well; according to the BizBuySell opinion poll, 84% of small business owners expect their businesses to perform better in 2018 versus 2017. With this positive outlook in the small business market and owners planning to reinvest and improve their businesses, Bob House, CEO of BizBuySell.com, in his Inc. article “Why Tax Reform Could Fuel More Business Sales” suggests that this confluence of factors could lead to an increase in small business sales. Here are some reasons why:
Baby boomer owners are ready to cash in:
- Baby boomers are taking advantage of improving market conditions to exit their businesses (as evidenced by current deal flow).
- House points out that owners could be taking advantage of the perceived benefit that will come with tax reform by putting their businesses up for sale now, rather than waiting for the true outcome, which may or may not live up to the hype.
There will be more attractive businesses on the market:
- Investments in business improvements and appearance will make businesses more attractive to investors and potentially increase business values.
- “Owners who invest their tax savings into capital improvements should expect to receive more for their businesses and find more buyers eager to take the reins.”
An increase in corporate customers:
- With the corporate tax rate dropping to 21%, larger companies will have the capital to work with smaller businesses for outsourced projects.
- House suggests that the corporate tax rate drop also “may lead to acquisitions, or just boost revenue of small business owners hoping to increase their asking price.”
Time for Baby Boomer Business Owners to Make Their Move
This perfect storm of potential tax savings, increased optimism in the economy, and favorable market conditions make this an ideal time for Baby Boomer business owners to sell. The tax cuts will enable business owners who are ready and have solid, profitable businesses to take advantage of high business valuations and the booming market for business sales.
Owners should contact their tax and business transition planning professionals in order to start planning as soon as possible. While all the nuances of the law have not yet been clarified (tax professionals are waiting for guidance from the IRS), doing tax planning this year is essential especially if owners are thinking of transitioning out of their businesses anytime soon. Income as well as business transaction tax can be minimized through proactive planning!
UNDERSTANDING AND PLANNING FOR 2018 TAX REFORM
June 5, 2018 – Alan Huberman CPA, MST, Tax Partner at BlumShapiro
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