The amount of cash available for acquisitions is going up in 2018 all thanks to the income tax changes that passed in the United States at the end of 2017. The increased flow of available cash should make a large impact on M&A immediately by increasing the appetite of buyers in the market.
C corporations are going to have a lot more cash for multiple reasons. First is the major decrease in their top tax rate to 21% down from 35%. C corporations are now allowed to repatriate cash held abroad by paying a onetime 15% tax on the liquid funds, a major change from before when it would be taxed as ordinary income rates as high as 35%. The minimum alternative tax for C corporations is gone now. Temporary depreciation rules that allow for immediate expensing of newly purchased assets will also help C corporations reduce their tax bills leading to C corporations having more cash to spend. Overall, there will be a lot of extra cash from C corporations based off the major tax changes in the United States.
Pass through businesses (Like S corporations, partnerships, and sole proprietors) will also benefit heavily from the new tax changes. Pass through entities make up about 95 percent of US businesses. Pass through entities will get a deduction up to 20% of their qualified business income. At the same time, federal income tax rates for individuals have also gone down with a max rate of 37% down from 39.6%. Pass through businesses also get to take advantage of the temporary depreciation rules that allow for immediate depreciation of newly purchased assets.
Not all the tax law changes will lead to more cash. New interest deduction limitations may have an impact for some C corporations and pass through businesses, especially highly leveraged or low profitability companies. One of the more well publicized tax changes is the new limit on state and local taxes that can be deducted off your personal federal income taxes. Overall, the tax law changes in whole will lead to a lot more money available for acquisitions.
When a buyer looks at an acquisition opportunity, they factor in all the cash flows of the new opportunity to understand what type of return they can expect to get on their acquisition. Reducing the taxes that investors pay allows them to pay more upfront to get the same return they were projecting in their analysis. Combine this ability to pay more with the extra cash the buyer has with their reduced tax liability and multiply that out to all the prospective buyers and that combines to many more aggressive buyers.
I expect an increase in available cash and better future cash flow projections will help lead to some of the highest sales EBITDA multiples ever. Many of these changes won’t last forever as part of the tax laws will revert over the next ten years. If you have sale on your mind, now may be the best possible time we have ever seen to consider selling.
Zachary Corson can be reached at 314-991-5150 or email@example.com