Baby Boomer Owners
There are approximately 76 million members of the Baby Boomers in the U.S. – roughly 25% of the total population. Over of 60% of all businesses are owned by Baby Boomers, totaling nearly 4 million companies. Baby Boomers began turning 65 in 2011, and will do so at a rate of 10,000 people per month for another 12 years or so. Business ownership does not last forever. As business owners move into retirement age, they will eventually need to transition ownership – either through intra-family or intra-company transfers or through the sale of the business to an outside party. While some business owners may hold out in the short-term waiting for the ideal time to sell, the generational shift in business ownership will win out eventually.
Impact of Tax Cuts and Jobs Act
With the passage of the Tax Cuts and Jobs Act in December 2017 (and the apparent positive reaction to this legislation in the public markets), the stage should be set for increased M&A activity throughout 2018.
Several provisions in the tax reform legislation should impact deal activity in 2018. Among the most favorable of these is the accelerated tax benefits that can be realized under the Section 179 Deduction. Under the previous tax regime, a bonus depreciation deduction was limited to 50% of eligible, new “qualified property”. Per the new tax law, “qualified property” includes tangible property with a depreciable recovery period of 20 years or less.
Under the new tax regime, the bonus depreciation deduction is extended to 100% of eligible property placed in service between September 2017 and January 1, 2023. In short, the new tax law paves the way for an immediate bonus deduction for 100% of the cost of any qualifying assets through 2022. The language of the Act is such that it allows for this deduction to apply not only to new property, but also to property acquired through acquisition, which will drive businesses to look to the middle market in efforts to reduce their tax burden and enhance cash flow through acquisitive activities. Clearly, this provision most greatly benefits asset intensive sectors, and it will be interesting to see its effects on M&A activity in these industries in the coming quarters. This part of the tax law creates an incentive for buyers to allocate as much purchase price as possible to “qualified property”, which could be beneficial to sellers depending on the basis the seller has in its tangible assets.
Originally appeared in Mercer Capital's Middle Market Transaction Update Newsletter: First Quarter 2018