The Valuation Implications of the 2018 Tax Reform

Significant Corporate Changes

Corporate valuations are a function of expected cash flows, risk, and growth. While the reduction in tax rates triggers the most obvious revision to expected cash flows, other provisions of the bill may also significantly influence cash flows for individual companies.

Tax Rate
Corporate tax rate reduced to 21% from 35%

Deductibility of Capital Investment
Through 2022, companies will be able to deduct capital investment as made rather than over time through depreciation charges

Deductibility of Interest
Interest expense deduction limited to 30% of EBITDA through 2021, and 30% of EBIT thereafter

Foreign Income
U.S. taxes due only on U.S. income, with one-time tax to allow repatriation of existing foreign retained earnings

NOL Carryforward Limitations
Max out at 80% of taxable income for year, no expiration

Like-Kind Exchanges
Changes to availability

The Impact on Valuation

Enterprise Valuation

Does a lower corporate tax rate make corporations more valuable, all else equal? Yes. Will all else always be equal? No. Appraisers will need to carefully consider the effect of the new tax law not just on rates, but on growth expectations, reinvestment decisions, the use of leverage, operating margins, and the like for individual companies.

Pass-Through Valuation

What effect does the new tax law have on the value of minority interests in pass-through entities, all else equal? It depends. The resulting differential between corporate and personal rates and the availability of the QBI deduction may cause some business owners to re-evaluate the merits of the S election. The ultimate effect on valuation will depend on the subject company’s distribution policy, the length of the expected holding period, and the perceived risk associated with the S election.

Word to the Wise

These significant changes should be evaluated on a company-by-company basis to determine what effect, if any, the changes will have on expected cash flows. Appraisers with deep experience in the relevant industry are best positioned to evaluate the potential effects.

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