While it is still too early to truly understand how small-business owners have been affected by the Tax Cuts and Jobs Act passed in 2017, based on early transaction data, it is fair to wonder if small-business tax savings will translate into an increasing number of ownership transitions.
Under the new tax law, many small-business owners benefit from a 20 percent deduction for qualified business income. While each owner should speak to an accountant for details on his or her specific situation, in general, single owners with a taxable income below $157,500 and married owners with taxable income below $315,000 qualify for the deduction. The hope of the reform is that small-business owners would re-invest those savings into their business and their employees.
While it's still too early to declare it a success, an early read of owners shows many do plan to invest those savings right back into their business. This includes increasing salaries and staffing to keep up with demand, investing in marketing to lift sales and making capital improvements to the business, all of which have a direct impact on value. The confidence by owners to reinvest their savings reflects a sense of optimism for the future. In fact, a recent BizBuySell opinion poll revealed 84 percent of small-business owners anticipate their business to perform better in 2018 compared to 2017.
As confidence grows and owners have the resources to make their business more efficient, the result could actually be an increase in small businesses changing hands, and here are some reasons why:
- Sellers ready to cash in. For a few years now, we've seen a trend of retiring baby boomers taking advantage of improving market conditions to exit their business. This is especially the case for those owners who sat through the recession waiting for valuations to return to a level that would support retirement. In what would be a Main Street example of "sell the news," owners could take advantage of the perceived benefit that will come with tax reform and place their business for sale now, rather than wait for the true outcome, which may or may not live up to the hype.
- More attractive businesses. While the expectation is for tax reform to boost immediate profitability, investments in appearance will make businesses more desirable over the long term. This includes investments in equipment, an extra coat of paint on the exterior, and even adding headcount to improve operations. Buyers will always be focused on the revenue history of a business but also put an emphasis on how well the business is setup for continued success. Owners who invest their tax savings into capital improvements should expect to receive more for their business and find more buyers eager to take the reins.
- An increase in corporate customers. As corporate taxes decrease, enterprises can use their tax savings to invest in small businesses or hire them for short-term projects. Corporate entities often hire small businesses for various tasks, from landscaping to consulting to temporary staffing, spreading the wealth and fueling local economies. With the corporate tax rate dropping to 21 percent, enterprises have the capital to engage with more small businesses in 2018. That may lead to acquisitions, or just boost revenue of small-business owners hoping to increase their asking price.
Small-business owners have plenty of reasons to be excited for the future. Will the tax savings, new investments, and higher valuations incentivize all small-business owners to sell? Of course not. Those who have been considering an exit for a few years, however, might be more inclined to take action in 2018.
Above all, the Tax Cuts and Jobs Act should empower small-business owners to take investment risks and pursue growth avenues previously closed off to them. Higher tax savings, a thriving economy, and surging optimism all point to lucrative opportunities ready for the small-business owner's taking.