The Year in Review and What to Watch for in 2016

The Year in Review and What to Watch for in 2016

February 9, 2016

REDW

Changes in interest rates, stock market values and economic and industry conditions can all impact the value of privately held businesses. In general, increases in the equity markets, lower interest rates and higher growth expectations – due to improving economic, industry or specific company expectations – point to higher values. Conversely, declines in the equity markets, rising interest rates and lower growth expectations may put downward pressure on values.

In addition, changes in corporate tax rates, all else being equal, would impact values of privately held businesses to the extent that after-tax cash flow is used to determine value – with reductions in tax rates increasing after-tax cash flow and value, and with increases in tax rates reducing after-tax cash flow and reducing value.

In the coming year, business valuations could be impacted by a number of current events. Listed here are some possible factors to consider:

Volatility in Equity Markets

The stock market hit record highs in 2015, and has subsequently retreated in 2016 as the markets have shed approximately 10% since the start of the year. Volatility in the equity markets was the name of the game in 2015 and this trend looks to continue. In addition to potentially impacting the value of privately held businesses, the depression of stock market values could make gifting of interests in LLCs, FLPs or other entities that have significant investment portfolios more advantageous.

Short-Term Interest Rates

In December, the Federal Reserve finally pulled the trigger on raising its benchmark short-term rate by a quarter percentage point (to 0.5%) after keeping it near zero for seven years. Fed officials have indicated that gradual increases are expected going forward, but have also said they would adjust that plan if economic data does not support it. The short-term rate generally impacts, but is not directly linked to, longer term interest rates.

Global Mergers & Acquisitions

Global mergers and acquisitions reached an all-time high of over $4.9 trillion in 2015, fueled in part by low interest rates and the expectation of higher interest rates in the future.

Commodities Pricing

Commodities prices overall slumped in 2015, with significant declines in the prices of energy, agricultural commodities, metals and other raw materials. These declines result in part from slackening demand, i.e., reduced or negative economic growth in many parts of the world, which may be spilling over to the United States. The price of oil in particular dropped from over $100 per barrel in 2013 to approximately $35 to $37 per barrel by the end of 2015, with U.S. oil prices closing under $28 per barrel on February 10, 2016. These price declines are having a significant impact on companies in these sectors, including oil and gas producers, as well as a depressive effect on the overall stock market.

Professional Standards

The field of professionals providing valuation, forensic and damages work continues to expand with new credentialing and standards setting organizations. Providers and users of these specialized services need to stay dialed into the ever-changing body of knowledge and professional standards.

Availability of Valuation Discounts

The IRS and Treasury Department have indicated they are working on proposed regulations under Section 2704 that would impact the availability of valuation discounts for transfers between family members – basically, by ignoring certain restrictions which currently result in discounts for lack of control and lack of marketability. While some prognosticators expected these regulations to be issued last Fall, and though such action is still uncertain, if issued, they could significantly impact the extent of valuation discounts available for ownership interests in certain family-owned entities.

PATH Act

In December 2015, the “Protecting Americans from Tax Hikes Act,†or “PATH Act,†made permanent many expiring or expired provisions of the tax law. The new tax act permanently cuts the 10-year period in half, to five years, on which S corporations that converted from “C†status have to pay corporate taxes on built-in gains. In addition, the Act made permanent the Section 179 expensing limit of $500,000 of depreciable equipment and certain other property. For a brief overview of the Act, click here to read a Special Report from BDO* regarding the December 2015 tax extenders.

2016 Elections

The results of the 2016 elections could certainly impact tax rates and tax policies, as each candidate has his or her own plan and views regarding potential changes to the tax code. House Speaker Paul Ryan (R-Wis.), also noted that he believes passage of the PATH Act is one of the biggest steps toward a rewrite of the tax code in many years and will help start a bold, pro-growth tax reform agenda in 2016.

While volatility may appear to be the overall theme as we ease into 2016, many opportunities to maximize the value of your business and assets still exist. We appreciate your business and hope to have an opportunity to work with you in 2016.


*REDW LLC is an independent member of the BDO Alliance USA, a nationwide association of independently owned local and regional accounting, consulting and service firms with similar client service goals. The BDO Alliance USA presents an opportunity for firms to expand services to clients without jeopardizing our existing relationships or our autonomy by accessing the resources of BDO USA, LLP and other Alliance members. The BDO Alliance USA was developed to provide Member firms with an alternative strategy for gaining competitive advantage in the face of a changing business landscape. The Alliance represents an opportunity for BDO to enhance relationships with reputable firms that share a mutual business understanding. The BDO Alliance USA is a subsidiary of BDO USA, LLP, a Delaware limited liability partnership.

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