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Tax Reform Impact on Sell-Side Transactions

08.21.2019

There are many factors to evaluate when a business owner is considering an exit plan. Sellers should think about how to structure the business, how to best package the business for sale, potential capital gains and the right transition plan.

For business owners planning an exit, the Tax Cuts and Jobs Act (TCJA) may impact the execution of a succession plan. Overall, most of the provisions of the TCJA don’t directly impact M&A transactions. However, the new tax law added and modified several provisions of the Internal Revenue Code that indirectly impact transaction structuring, pricing negotiations and due diligence. The TCJA also provides many new opportunities for tax planning as you evaluate your succession plan.

Below are some of the key changes impacting sell-side transactions because of the TCJA:

  • Overall M&A landscape. The TCJA reduces the corporate tax rate from 35 percent to 21 percent and repeals the corporate alternative minimum tax (AMT). The new law also added a 20 percent deduction on pass through income under Section 199A. Sellers will need to model several disposition alternatives to determine their optimal exit strategy.
  • Interest expense limitation. Disallowed interest deductions may be carried forward and do not expire. Sellers with interest carryforward may prefer asset sales over stock sales in order to offset capital gains.
  • Temporary 100 percent expensing. 100 percent expensing is available for the purchase of certain U.S. tangible assets from unrelated parties. A potential increased depreciation recapture will incentivize sellers to further negotiate a favorable purchase price allocation upon sale.
  • Carried interest holding period. Carried interests must be held for three years in order to treat capital gain as long-term. Sellers may want an equity rollover treatment, or a gross-up on additional tax if a rollover is not possible.
  • Self-created intangibles. Self-created intangibles are no longer characterized as capital assets. Sellers will likely be incentivized to negotiate a favorable purchase price allocation to minimize ordinary income realized on sale.

Selling your business may be one of the most significant transactions you make, so it’s important to consult a trustworthy advisor when valuing and structuring a deal. A lack of proper exit and tax planning can force business owners to make concessions to sell their business or have a business that is unsaleable.

If you are considering selling your business and are unsure how the new tax law might impact you, contact Patrick McGuire, Tax Principal, at 314.687.2389 or pmcguire@bswllc.com.

To learn about our services for the private equity industry, contact Bryan Graiff, Transaction Advisory Partner and Private Equity Industry Group Leader, at bgraiff@bswllc.com or 314.983.1390.

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