Tax Concerns Drive M&A Surge: MarshBerry Report

Fears of a significant rise in US capital gains tax (CGT) could drive an increase in mergers and acquisitions (M&A) activity this year, says insurance broker and wealth advisor MarshBerry.

In its 2023 M&A Year in Review outlook for insurance distribution, wealth advisory, and retirement planning markets, the broker forecasts that the November election and President Biden's tax plans could see federal CGT exceed 44 percent, more than twice the current level of 20 percent.

Biden was clear that his goal is to raise taxes on anyone who earns more than $400,000, MarshBerry says. For corporations, Biden is looking to raise the corporate tax rate to 28 percent and end tax breaks for executive pay above $1 million, disallowing deductions for individual pay above that threshold.

CGT increases are a key component of Biden's 2025 budget proposal, MarshBerry says. The proposal suggests nearly doubling the capital gains tax to 39.6 percent on investors who earn at least $1 million a year. The proposal also highlights the 3.8 percent Affordable Care Act surcharge, which is applied to passive investment income, indicating it would also be applied to active investment income.

A possible second Biden term might create an M&A environment similar to that of 2021, when a record number of firms were sold believing that they might be negatively affected by a potential federal CGT increase, the report states. Today, "owners who might have been considering selling in the next few years may start to ramp up their timelines and try to get ahead of any possible tax changes in 2025 that would impact the sale of their business and their personal net gain."

The direction of the economy this year will likely be shaped by government policy, the broker suggests, with the Federal Reserve continuing to signal the potential for three decreases to interest rates by the end of the calendar year, which would "likely mean a 75 basis point reduction."

Most commentators "describe insurance brokerage M&A activity in 2023 as a 'down year' … with [the number of] transactions down compared to 2021 and 2022," MarshBerry says, despite 2023 being the third most active year on record for insurance brokerage M&A.

Since 2013, M&A deal activity has seen a 10-year compound annual growth rate of 9.6 percent. Thus "context or vantage point is also very important as we focus on what comes next for the industry," the broker says.

MarshBerry concludes that companies "must take some sort of action, sooner rather than later. If your firm is not committed to continual double-digit organic growth outside of a hard market, you will have a tough time keeping up with the valuations that may be available today."

MarshBerry is an adviser for insurance brokerage and wealth management firms, offering M&A. It also provides business consulting, market intelligence, and peer exchange services.