Any impact to multiples from Section 174 changes? Not in this industry

BVWireIssue #253-4
October 25, 2023

industry analysis
transaction data, transaction multiples, benchmark, industry analysis, guideline transaction method

The tax code’s Section 174 requires research and experimentation (R&E) expenses to be capitalized and written off over time. This is a change the 2017 Tax Cuts and Jobs Act made that became effective starting with calendar year 2022. Capitalization versus expensing is not simply an accounting optic—it can trigger unplanned tax liabilities that could impact cash flow. Efforts are underway to eliminate this change in the tax law. In the meantime, has the change had an impact on valuations in the marketplace? Not for architectural and engineering (A/E) firms, according to industry experts Rusk O’Brien Gido + Partners. “Regarding the marketplace for A/E firms, we have yet to observe any material impact on valuation multiples of publicly traded firms or in private market transactions (mergers acquisitions) from this change in the tax code,” they wrote in a recent article. “This is likely due to remaining uncertainty over whether or not the tax code may be amended and the ability of many firms to mitigate the impact through various tax strategies.”

They advise appraisers to take this tax law change into account—especially for the technology, healthcare, manufacturing, and engineering industries. Many firms have already paid unexpectedly large tax bills, they point out, meaning a reduction in cash balances (or increased debt) could reduce equity value.

Extra: Rusk O’Brien Gido + Partners publishes a regular study of current trends in the transacted values of architecture, engineering, and environmental consulting firms. To order the latest version, click here.

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