THE LARGEST INCREASE TO US BENCHMARK INTEREST RATE SINCE 1994

The US Federal Reserve introduced the largest increase to its benchmark interest rate since 1994 on Wednesday June 15th, 2022. The 75-point rate hike will impact credit card rates, car loans, savings accounts, and other ways people borrow money and by extension the businesses that sell to consumers and business alike.

With Interest Rates having risen Across North America, What Does It Mean for Your Business?

As a business owner you will have heard the many reports that historically low interest rates and the days of “cheap money’ have ended. Canada’s inflation rate is the highest in 30-years, And the US had the highest inflation rate since June 1982. 

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

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. 

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 increase 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 reasonable. 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 have risen, 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.

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ABOUT THE SHAUGHNESSY GROUP

We founded the Shaughnessy Group in 2017 with the purpose to help business owners successfully transition out of their most valued asset, their privately held, lower middle-market company. Since our founding, our clients have asked us to aid them beyond the sale or divestiture of a division or business, to help them to grow through acquisition and source debt to fund their acquisitions. www.shaughnessy.group

ABOUT THE AUTHOR

Karl Sigerist is an advisor to shareholders, board members, owners, entrepreneurs, and executives; on governance, strategic and corporate finance issues through the business life cycle; buying, financing, and selling their business.

Founding member of 8 start-up organization within the public/private investor community and 3 turnarounds of Canadian and European private/public organizations.

Led the growth of business-to-business technology, specialty finance, warranty, and creditor insurance organizations through 3 mergers, 38 acquisitions, 34 strategic alliances $965MM of capital raises and 5 digital transformations into leading national brands and platforms.

Fostered cultures and teams that achieved Growth 500 status for five consecutive years and Top 100 Small & Medium Enterprise Employer honors for two consecutive years.

Mentor to business school students and newly immigrated Canadians on their personal and professional growth. Volunteer on not-for-profit boards. https://www.linkedin.com/in/karlsigeristjr/

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