Are the Tax Cuts Influencing M&A Activity?

Corporate liquidity is exceptionally high across the U.S. this year, thanks to windfalls resulting from the Tax Cuts and Jobs Act (TCJA) signed into law in December. Is this liquidity spurring a new round of acquisition activity in the pest management industry? What about small and mid-size companies: Are they more likely to sell given the more favorable tax environment? PCT asked four M&A experts to weigh in on the potential impacts of the tax cuts.

Rand Hollon, Preferred Business Brokers, Ocala, Fla.: Current and future tax liability affects both buyers and sellers because it affects cash. The 2017 tax reform legislation did a number of things to put more cash into the game — notably, reducing the four-step rate structure for C corporations and allowing new deductions of up to 20 percent of qualified business income for pass-through owners of S corporations and LLCs. Additionally, increased bonus depreciation and Section 179 expense items work to reduce taxable income, freeing up cash to be used elsewhere.

Let’s face it: Buyers aren’t the only ones looking to put cash to good use; sellers are looking to do the same. And anything that works to free up cash otherwise earmarked for tax liability benefits buyers and sellers alike.

Tax issues that may affect those contemplating selling their business include the new lower C corporation tax rate reduction for those companies that operate as C corporations; while long-term capital gains tax rates have not changed under the new law, the most lucrative deals will still be structured to take advantage of these lower rates. In addition, under the new law, the lifetime exemption for estate/gift taxes has doubled, which will allow passing the proceeds from these deals to heirs in a much more tax-efficient manner.

Paul Giannamore, Potomac Pest Control Group, Philadelphia: I expect the tax cut to be a double-edged sword. On one hand, those who have wanted to sell their C corporation over the past few years but have not due to high corporate tax rates have been handed the opportunity of a lifetime. Lower corporate tax rates and record-high valuations have opened the door for them. We are seeing this play out in the market right now.

On the other hand, I don’t consider this new legislation tax reform but rather a tax cut and spending increase. D.C. has effectively handed Americans “government on a credit card.” At some point, that credit card payment is going to come due. The tax cuts and increased spending will dramatically increase the federal budget deficit and push interest rates higher. We are already seeing bond yield spikes. This is going to increase borrowing costs and have a negative impact on M&A volume in the medium to long term.