How Your Business’ Value Is Impacted Under The Tax Cuts And Jobs Act
By now, you may have a pretty good idea of the implications you’ll face as a result of the Tax Cuts and Jobs Act (TCJA). But how much thought have you given to the impact the new tax law could have on your company’s value?
Tax reform legislation has effectively impacted rates and market activity associated with the three well-known methods used to determine a company’s value. And that means that the value of your business is likely to be impacted, meaning it’s never been more important to conduct a business valuation to determine its true value than it is today.
What’s The Deal?
The cash flows generated by your business are utilized to determine its true value under several common methodologies: the guideline public company method, the discounted/capitalized cash flow methods and the guideline transaction method.
Depending on the method chosen by your valuation consultant, different components will need to be considered in the analysis of your company’s valuation. Here’s a little more insight:
Guideline Public Company Method
This market approach uses pricing multiples displayed by comparable businesses to find your company’s true value. Interestingly, public returns in 2017 indicated that many people were expecting increased future cash flows because of significant increases in equity market returns and pricing multiples.
Discounted/Capitalized Cash Flows Methods
These two income approaches determine value by projecting and discounting the future expected cash flows of the business at an appropriate rate of return. Initially, the TCJA looked promising for businesses because tax rates mostly decreased to a set rate instead of a marginal rate. This change gives owners more distributable cash flows which, in turn, produce a higher valuation. That being said, TCJA influences regulations and valuation factors that could counteract the would-be gains from the lower tax rates.
Guideline Transaction Method
This market method utilizes actual transactions from similar businesses to determine what pricing multiples should be used. This approach takes into account historical transactions, and if they occurred before the TCJA was signed into law, may not be the best indication of future transactions. That said, your valuation consultant should expect to make necessary adjustments to the multiples which reflects the changes outlined in the TCJA.
Tip Of The Iceberg
A full, comprehensive business valuation must take into account more than just the items outlined above. With all of the changes that have been triggered by the TCJA, one thing is certain – there is not a single valuation solution that will work for every business. Your business is unique, so it’s important to work with a valuation consultant who understands the complexities of tax reform.
If you have any further questions about how the TCJA will impact the value of your business, email Rea & Associates or call me directly at 614.923.6556.
By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland office)