Clients, acquaintances, and friends have been asking us that question since the tax reform became law. First, let’s review some of the major components of the law that could have an impact.
What the tax reform law does is principally lower taxes. But, since Congress needs to keep spending in line with revenues, the supply side theory also must allow for ‘shortfalls’ in the math, and that is where your business might be impacted.
For example, to ensure that appropriate revenue to pay for the federal budget is in place, certain tax deductions that you’ve been used to have been taken away. One key one is meals and entertainment. You can no longer write-off those sales and marketing events where you brought clients or prospects to say, the PGA golf tournament, or other sporting events. What does that removal do to your bottom line? How does that change your company’s approach to future sales generation?
Since the tax reform will also add to the country’s debt, any tax savings could be eaten away from likely future increases in the prime lending rate. If you invest heavily in capital equipment that could impact your going forward operations.
If you own your company and are a pass-through entity, you may not see any gains to your profits depending on your size and type of business. For many small businesses, there will be a 20% adjustment to your AGI, but that benefit is not available if you are a SERVICE company, or if you earn greater than approximately $315,000. Is that your company? Do you just perform services, or are you a manufacturer, or retailer?
Work with your tax advisor to get a detailed breakdown of the tax reform legislation. Inc. magazine has a summary of relevant point for businesses in this article. Or try this Journal of Accountancy article.
The answer to selling your business though lies in five easy questions.
First, are you mentally ready to sell? Consider your personal situation. Even without tax reform, would you be able to sell your business now? If not, it’s highly unlikely the tax reform will make your company more salable.
Second, are you a “C” Corp? If you own a “C” Corp, you may now gain additional interest from investors since the marginal tax rate has been reduced by 15%. What this will do will bring more interested buyers to the table. It will also allow you to impute a higher value since your free cash flow will be greater and therefore be able to service a higher debt limit that a buyer may need to get you to sell.
Third, do you have a service based pass-through entity like an ‘S’ Corp or an LLC/LLP? If you are an “S” Corp or LLC, the likelihood is that most of the value of your business, as viewed by an outside investor, will likely not change significantly. Yes, if you happen to have a low cash flow and are not a service based entity, there will be that 20% incentive, but for most business owners who’ve built up their business over the years and are now ‘ready’ to sell, their income will likely lead to exclusions or reductions of that allowance.
Fourth, will other personal tax reform changes COST you money? Start with this. Do you live in a high-tax state like NY, CT, NJ, CA? If so, most business owners will likely have new limitations to the deductibility of their yearly earnings related to state and local taxes as well as property taxes. If that changes your lifestyle, you may want to sell now and either retire, or even find/start a new opportunity in a new state, or at least one with a lower tax base.
Fifth, have you considered the future or are you stuck in the present? With all the elation of lower taxes will it improve your life and continue indefinitely? No one knows the future, but the new reforms do have some personal tax adjustments being terminated or phased out in the future years, so what’s a benefit to you today, and what a buyer sees for their personal benefit will not look as rosy in say 5-7 years.
Selling a business is not easy. Continuous changes to the economy, business operations, and your life make planning to sell a business difficult. Consider all your options. Look to the future, but be cognizant of where your company currently is in its lifecycle. If your company is really ‘ready to sell’, then consider it now – these reforms will only have prospective investors more interested!
Steve Wain is the President of Calder Associates. Steve advises companies on strategy, business sale preparation, finance, and process, technology, organizational, and financial improvements.
Considering selling or buying a business? Call the professionals at Calder Associates. Learn what your company is worth, and get educated on the process.