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HOW INTEREST RATES CHANGES WILL IMPACT BUSINESS VALUATIONS.

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With Interest Rates Anticipated to Increase Across North America, What Does It Mean for You and Your Business?

As a business owner you will have heard the many reports that historically low interest rates and the days of “cheap money’ are ending. In January 2022, Canada’s inflation rate was the highest in 30-years, at 5.1%. And the US had the highest inflation rate since June 1982, at 7.5%. As a result, interest rates are predicted to rise 2-3 times this year. Rates have been extremely low since 2008’ and for the first time since the last recession, we are starting to see rate increases. According to the Canadian and US governments, the target rate increase in Canada will be 1.25-1.5%, and in the US 1.75%.

What does this mean for you and your business valuation? Simple, if you are considering selling, consider acting now while valuations are still high.

If you are currently invested with a long-term focus, the expected rise in interest rates will remain part of the ebbs and flows of any business operation. However, this may have a significant impact if you are thinking of selling in the next few years therefore, you should consider acting now while we are still at the peak of the market. Most Business Owners (Not impacted by the Pandemic) are enjoying increased profits which means that currently, valuations are still high. But be careful. Do not put it off any longer. Rising rates will soon increase the pressure on Business valuations.

It is important to consider that a transaction is concluded on average in 6 to 24 months. The general sentiment is that if you want to close before the end of your next fiscal year, start the process well before as soon as possible.

The Impact of Rising Interest Rates.

Let us break down the impact rising interest rates will have on an acquisition loan (utilized by most acquirers to fund a purchase) and any operating lines of credit (used by most operators to fund day-to-day ongoing operations):

Acquisition Loan Financing

When it comes to an acquisition loan, a few things will occur with the rise in interest rates:

  • The cost of acquisition financing will increase.
  • Future cashflow from acquisitions will decrease, meaning that purchase prices may be pressured down and lowered so the business can sustain future payments.
  • Negative pressure will be placed on future cash flows - again this affects the Business valuation.

Operating Lines of Credit

Rising interest rates present a similar scenario for all other forms of credit and the interest on your other credit products:

  • It will increase Operating, inventory, floor plan and any other interest expenses.
  • Reduce Business earnings before tax.

Three Steps That Should Be Your Top Priority If You Are Considering Selling Your Business.

How do you start the process? It can be an overwhelming task, especially while running a busy organization and trying to fit in the Mergers and or Acquisition process. Here are three basic things that should be a top priority if you are considering selling:

  1. Get a valuation of your business to establish exactly where you stand in today’s market (Click here to request our free guide) .
  2. Get your operations and accounting in order. As the Business value is determined from your past, present and future financial performance, having your financial affairs in order is the key and this effort will never be lost. It is all about having a solid foundation.
  3. Consider the legal implications and potential tax liabilities. Study your liabilities and all the necessary accounting aspects.

Most Business operators should not manage all this alone. It is wise to consult with an experienced Legal, Accounting, Tax, Mergers and Acquisitions advisors to ensure you have all your bases covered, as there are so many moving pieces to the Mergers and Acquisitions puzzle.

The good news is that the market is still strong, and valuations are excellent. And, whatever changes are coming, as a business owner, you will still be at the center. Change creates uncertainty and this will inevitably lead to more Mergers and Acquisitions in the future.

In summary, you have been enjoying an incredibly strong market and business valuations are currently very favorable. But we know interest rates are rising, which will place pressure on and eventually reduce the value of your business. If you are thinking of selling, in the current market, no time is better than the present. To start the conversation.

Next steps?

REQUEST OUR BUSINESS VALUATION GUIDE.

This free e-book we will explore:

  • Preparing for a valuation.
  • Valuation methodologies.
  • Valuing intangible assets.
  • Valuation mistakes to avoid.
  • Price and or value.

An exclusive offer to receive your confidential custom business valuation at our expense.

Request the Business Valuation Guide

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