Bottom line — Changes are likely to affect dealership valuations in 2022
Even though none of these tax code changes are currently in effect and their final form remains unknown, it looks likely that some of them will become law before the 2022 congressional elections. Once passed, they’ll begin to make a difference in the market, even before they take effect.
Overall, these changes could take an additional bite of as high as 25% from the proceeds of a dealership sale. That’s a lot, and it will almost certainly affect dealership valuations.
On one hand, sellers may be inclined to raise their asking prices to compensate for the required tax payments. On the other hand, buyers may be less inclined to pay high prices, because taxes will cut into their return on investment. This pull in opposing directions has the potential to slow down the current accelerated pace of the buy-sell market.
If you’re currently in the process of buying or selling a dealership, many financial consultants recommend that you complete that process in 2021 if possible.
The current automotive M&A environment is extremely healthy, and it’s not going to stop. However, dealership sales can take 6-12 months to complete, and it may be advantageous to act sooner rather than later.
It’s never too early to have a discussion with your tax consultant or CPA about these potential changes and how they will affect you and your plans for the future, both individually and as a dealership principal. This way, you can be prepared with some options and strategies when the final changes become known.