How the Tax Cuts and Jobs Act (TCJA) will Impact Private Company Valuations
Business owners have been asking how the new tax law will impact private company valuations. CPA's, attorneys and business valuation experts have composed analyses, and we will summarize the significant areas that impact our clients - the owners of privately held businesses.
In general, most businesses will pay less in federal income tax due to lower tax rates beginning in 2018, which translates into higher after-tax profits and after-tax cash flow. As businesses are typically valued using EBITDA, which is computed "pre-tax", most of the valuation methods would not change. However, one valuation method, Discounted Cash Flow, would be affected. Those businesses that are primarily valued using this method could experience an increase in value, although in most cases, not as much as one might think. In any case, we would not anticipate changes in the tax law to have a significant impact on transaction valuations.
When valuing a private business, experts must consider the economic conditions, industry trends and regulatory environment that exist on the valuation date. In addition, the access to and cost of capital for a transaction, consisting of debt and equity weigh heavily into the equation. Currently, the market is very strong and debt is relatively inexpensive, so that component of the equation is favorable. For the purpose of this discussion, we will limit the valuation impacts to those affecting the value of an enterprise stated on a "cash free" and "debt-free" basi