20 Points to Consider for Valuations Under the New Tax Law
Chances are you haven't yet done a valuation that reflects the Tax Cuts and Jobs Act. After all, it wasn’t “known or knowable” until it was signed into law late last year (Dec. 22, 2017). Since then, BVR has been gathering opinions and observations from valuation experts about the impacts of the new tax law on valuations. The following list of what to consider is by no means exhaustive, so valuation experts are urged to read more about the changes.
INCOME APPROACH
1. Overall, valuation methodology may tip more in favor of the DCF since history is under a different tax regime.
2. Cash flow forecasts need to go out for the number of years that the new tax provisions are in effect (some are temporary).
3. Forecasts of income tax expense and depreciation will be affected—also the benefits of NOLs.
4. Assumptions must be made as to how any cash savings will be used; not all of it will hit the bottom line immediately depending on how it’s used: for reinvestment, share buybacks, debt repayments, dividends, new hires, etc.
5. Depending on how companies use extra after-tax cash flow, assumptions about growth will be affected.
6. Some industries get special tax breaks under the new law.
MARKET APPROACH
7. The use of the market approach may give way more to the income approach since the tax changes affect future income (which is what buyers are after).
8. Market multiples increased throughout 2017 and likely already reflect adjustments.
9. You may see differences in market versus income approaches during the months leading up to enactment.
COST APPROACH
10. When applying an adjusted book value methodology, you will need to adjust the estimated taxes on the difference between the appraised value and tax basis of the assets.
PASS-THROUGH ENTITIES
11. The revised difference between the effective rate for C corps versus pass-through entities needs to be carefully considered.
12. PTEs appear to increase in value under the new tax law, but appraisers must consider the intent of the owner as to what he or she will do with this increase in value.
13. As part of the PTE tax relief, the owner’s reasonable compensation figures into the calculation of the new Qualified Business Income (QBI) deduction (Section 199A); this means more scrutiny on reasonable compensation and the need for more studies.
14. Tax rates for individuals and small businesses have a termination date, so determining a terminal value will tricky.
COST OF CAPITAL
15. A material change is not foreseen in the risk-free rate or equity risk premiums.
16. Tax shield benefits of interest expense will decrease, affecting the cost of debt (may affect optimal capital structure).
17. Large companies that rely on debt capital financing will likely see an increase to their WACC.
OTHER18. Many companies may relocate their intangible property, which will trigger transfer pricing issues.
19. The higher threshold for estate tax may reduce the need for appraisals for this purpose, but valuations to establish date-of-death basis would still be required.
20. Alimony is no longer deductible to the payer nor taxable to the payee, which will change the dynamics in divorce engagements.
As mentioned before, the above list is by no means complete and there are many more nuances to consider when doing valuations under the new tax law.
Stay updated on the lasted valuation news related to the Tax Cuts and Jobs Act with Business Valuation Update and BVWire.
