Insights & Info

Insights > The Impact of Tax Reform on Middle Market M&A Activity

The Impact of Tax Reform on Middle Market M&A Activity

By Generational Equity

Tax Reform Impact

Recently, Mergers & Acquisitions Magazine published a piece examining the potential impact of 2017’s tax reform legislation on M&A activity. It is probably the most comprehensive overview I have seen so far and had some very relevant points for both sellers and buyers.

Overall, the writer suggests that 2018 M&A activity will be positively impacted by this legislation for two key reasons:

  1. The reduction of the corporate tax rate
  2. The repatriation of funds held overseas by corporations

Here are some excerpts of the salient points relating to this:

One of the most anticipated changes of the act included a reduction in the corporate tax rate from 35 percent to a flat 21 percent and the repeal of the corporate alternative minimum tax. Both will increase the after-tax profitability of corporations.

We have already seen that some corporations are using these extra savings as compensation incentives for employees but corporations will also be looking for making additional investments in the business, which sets the stage for M&A activity.

Based on our conversations with corporate buyers so far this year, we concur with this analysis, especially the segment I have bolded above. The significant profitability enhancement that corporations will see this year, as a result of this tax reform, will most likely spur a great deal of investment in areas such as R&D and employee incentives. However, acquisitions will probably play an even greater role.

The Impact of Tax Reform on Repatriation of Funds

Here is the point made in the piece on repatriation:

The act also includes a one-time repatriation tax on accumulated earnings held overseas. The repatriation of these funds by major corporations will likely be invested in one form or another to avoid additional taxes in the future.

This could set up a tremendous opportunity for the middle market because corporations may likely use their repatriated cash to acquire companies that complement their core business.

Again, like the corporate rate reduction, the act’s impact on freeing capital for investments will put the burden on acquirers to put that capital to work in the U.S. which may result in enhanced multiples.

There are two critical, related items found above. First, the best use of this cash coming back from overseas will be the addition of complementary companies to an organization’s business model.

Again, as we discussed in a prior article on how tax reform impacts M&A activity, the fastest, most efficient way to gain market share, new talent and new clients is via acquisitions. Repatriation will allow more of this.

Secondly, because the best use of this capital will be for acquisitions, a lack of quality targets may create a bidding war, raising business valuations overall. Although this remains to be seen, it is evident from what we experienced last year that valuations are creeping up, especially for well-run, profitable, growing middle market companies.

The Great Unknown for Tax Reform Legislation

This is great news if you are already in the midst of your exit plan and are in the market or going to be later this year. But, the article also points out the great unknown facing deal-making: the mid-term elections.

As of now, it is possible that Democrats could retake one, if not both, houses of Congress in this year’s election cycle. As we all witnessed from the coverage of the act’s passage, Democrats are not fans of this new legislation, which some have called a “corporate give-away.”

If Democrats become the majority, they might reverse the recently passed tax legislation, bringing back closer parity in individual vs. corporate tax rates.

Now this is a future event that is difficult to predict at this juncture. However, what it does imply is that if you want to take advantage of the tax reform’s benefits to our current seller’s market, you need to act sooner rather than later.

I have never heard a business owner lament that he started his exit plan too soon…. but I have heard dozens complain about how they waited too long.

Wise business owners are surveying the M&A landscape and are taking action now to hire an M&A advisory firm to guide them through the process of finding an optimal buyer, at the optimal time, for their company.

Start Your Exit Strategy with Generational Equity

Generational Equity is one of the leading lower middle market M&A firms in North America. If you would like to learn more about how our experienced advisors can help you, give us a call at 972-232-1121 or visit our website to leave us your contact information and we will be in touch.

If you would like to hear from a few of our clients about their decision-making process and how we helped them reach the next phase of their lives, follow these links:

And, to read the entire Mergers & Acquisitions article I am quoting from, please follow this link: Opinion: How tax reform will boost middle market M&A.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

Make an informed decision

The best decisions in life are informed decisions. We release educational business insights like this every week. Subscribe to make sure you don’t miss the latest news, views and analysis.

Success

Success, you have been added to our list.

Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.
JoAnn Ellis, Owner of Fondren 5 Star Kennels
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.
Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.
Larry Moore, Owner, A Company Portable Restrooms
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.
Pete L.
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Betty L. Brennan, President, Taylor Studios
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.
Bryan D. Horn, Owner, Over Under Clothing
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.
Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward. P.S. Given my experience with GE I felt comfortable enough to sign up with Generation Wealth Advisors!
Tom Currier, Former President & CEO, Rackmount Solutions
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.
Caroline Connelly, CEO, OptoTest
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!
JoAnn Ellis, Owner of Fondren 5 Star Kennels
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!
Eric Erlandson, Owner, Action Fastenings, Inc.
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.
Shane and Johanna Kline, Owners of Vision Upfitters
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.
Robert Evans, President and CEO of Mealtracker Dietary Software
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.
Rick Greene of Dobbs Equity Partners LLC
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.
Salvo Stoch, Founder and CEO of Sleeping Partners
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse