Lower business tax rate impact on multiples

April 12, 2019

by a searcher from Harvard University - Harvard Business School in New Jersey, USA

Hi all, have we seen any impact of the 21% corporate tax (vs. previous 35%) impact trading EBITDA multiples on SMEs? I know literature from previous years typically speaks to trading multiples in the 3-5x range on EBITDA, however with lower tax rates achieving a 25% IRR could be possible (depending on assumptions, obviously) at now higher multiples based on the more favorable federal tax rates. Perhaps it's a win for the searcher over the next year or two as the market adjusts?

Thanks for any thoughts!

Reply by a searcher
from University of Virginia in Richmond, VA, USA

Intuitively, they'd have to move down. The default value of a business in steady state is the free cash flow divided by the WACC minus the growth rate. Lower taxes mean a higher WACC assuming all else is equal because the tax shield is smaller. And that means the value must decrease a little.

That's in general but it doesn't take into account tax changes affecting things that can affect free cash flow like opex.

Reply by a searcher
from Cornell University in Boston, MA, USA

In limited experience I have seen some of the opposite -- business owners saying they are making more money under the new system from the same business and therefore would want more money to sell their business. EBITDA is great, but what matters to most people is the money in their pocket at the end of the day, and under the new tax rate most business owners are seeing more money in their pocket.

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