Tax Reform Impact on Business Valuations
March 27, 2018 § Leave a comment
The Tax Cuts and Jobs Act (TCJA) signed into law in late December created major tax changes for both individual and business taxpayers. Companies have already started deciphering the TCJA and are planning for how the new changes will affect their tax situation in 2018 and beyond.
An additional consideration for businesses is how will the TCJA affect the overall value of the business. A general principle of valuing a business discounts projected after-tax cash flows from the business back to a present value. Higher after-tax projected cash flows lead to higher business valuations. On the surface, companies should expect some reduction in tax, which should correspondingly increase business value.
It is a highly recommended best practice that business owners annually review the value of their company for various planning purposes. Closely held businesses are often the largest asset a business owner holds and it is important for owners to know value fluctuations from year to year. The TCJA provides another opportunity to review the value with the projected value increases for businesses.
Business owners should take this opportunity to review their buy/sell agreements and determine if any changes should be included in the buy/sell based on the updated business value following the TCJA. It is also a good reminder that closely held businesses need buy/sell agreements if they do not have one in place currently.
As a follow-up to buy/sell agreements, business owners should review the funding arrangements if a buy/sell is triggered. Some businesses hold company owned life insurance policies that are intended to fund the buy/sell agreement if needed. With the increase in business values, companies should review if these life insurance policies or other intended funding sources are still adequate to cover the new business values when an ownership transfer occurs.
Estate planning and wealth transfer strategies should be reviewed to factor in the new business values as well. The increase in value of a closely held business may require a shift in wealth planning strategies.
In general, businesses will see reduced taxes and increased cash flows that will increase value with changes enacted under TCJA but each situation will be unique depending on each company’s set of circumstances. These changes provide a great opportunity to review the impacts of your business. We recommend you contact us if you are interested in exploring in greater detail what the effects of the TCJA will have on your situation.