Lower business tax rate impact on multiples

by a searcher from Harvard University - Harvard Business School

5 years ago

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!

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7 comments

searcher from University of Virginia-Darden - Darden School of Business

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.

5 years ago | like reply | 1 like

searcher from Cornell University - College of Business

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.

5 years ago | like reply | 3 likes

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