How ObamaCare Costs Could Affect M&A Deal Values in 2013

As middle market mergers and acquisitions heat up this year, the value of your company could be viewed more specifically if you are near the employee threshold of 50 Full Time Equivalents (FTEs).

From a middle market investment banker point of view putting your finger on how these issues for business owners will impact valuations and buyer perspectives is in the DCF assumptions, right? Let’s say you come to me and want to sell your company. You have 60 FTEs and spend $360,000/yr ($6,000/employee) for benefits and expenses. Under the new laws a new owner could cut that expense down to $30,000. That’s a savings of $330,000 each year. How?

According to the ACA (Affordable Care Act) employers on the 50 person cusp are given a 30 person exemption, and penalized only 2.5% over $9500 in salary per employee for the remaining 30 staffers. Depending on how much you pay your staffers, ie) Salaries in the $50,000/yr range will incur roughly a $1,000 penalty, you can see where this is going. In other words if a small business owner decides to sell the business, there could be a tempting maneuver to increase take home earnings immediately by pushing health care costs onto the public at a huge discount. Notwithstanding the inherent risks of the switch, saving over $300,000/yr could be irresistible. For a seller that is approached under this scenario the increase in enterprise value could conservatively exceed $1.5mil in today’s deal dollars. Add that to the deal value and many sellers might blink.

While I have not seen this M&A scenario baked into any new deals yet in 2013, it will certainly become a growing question between middle market business owners on the cusp looking to sell later this year. If you’re interested in how a few real world companies are expecting to deal with the new Obamacare rules, take a look at Adam Bluestein’s article in Inc Magazine this month where he takes a close look at 4 case study company CEOs on the edge.