How Higher Interest Rates and Inflation May Impact Sales

The current economic environment is unprecedented in the era of mergers and acquisitions (M&A). Inflation is now at levels not seen since the 1980s, and the Federal Reserve has responded by raising interest rates to stop the bleeding. These factors have created a lot of future uncertainty, and it has opened questions about what the business sales market is going to look like during the coming year and beyond.

Inflation Rates

The present market conditions are unlike what we have seen in at least a generation, and with so many factors at play, it will be a while before we are able to know for sure how inflation and higher interest rates will affect selling a business.

The combination of increased expenses for businesses, lower revenue (which many businesses will experience during a recession), and the tightening of the money supply (i.e., increased interest rates) would put major downward pressure on the value of a business. But it was a big seller’s market going into 2022, so maybe these factors will just serve to create more “normal” conditions, such as those that were present before the pandemic.

As we go into the second half of 2022, here are some things for potential business sellers to keep in mind:

Inflation Does Not Impact All Businesses Equally: Inflation is not good for anybody, but some businesses have an easier time dealing with it than others. For example, trucking companies have seen fuel prices more than double during the past couple of years, but they are forced to eat a lot of these costs because it is untenable to pass all of them along to their customers.

Restaurants are in a similar situation with rising food costs. You can raise the menu prices some, but during a recession when consumers have less money to spend, you will need to find other ways to make up for some of these expenses as well.

If, on the other hand, you are the type of business that does not rely heavily on fuel or food to serve your customers, then inflation will not have as much of an impact on your operations. Examples of businesses in this category include CPAs, attorneys, and other firms that can do most or all their work remotely. The values of businesses like these will not be hurt as badly by inflation and interest rates.

Private Equity Money is Not Going Away, but Some Capital May Go Elsewhere: In recent decades, many upscale investors who seek a strong ROI have been putting their money into private equity rather than bonds. And these private equity firms have been on a spending spree buying up promising businesses.

Higher interest rates might make bonds more attractive again, which could divert some of the money that would normally go into private equity. But private equity money will still be there, they just might be choosier about which businesses they decide to purchase.

Higher Interest Rates Mean Buyers Have Less Purchasing Power: The increased interest rates will significantly impact the purchasing ability of prospective business buyers. As an example, if an individual must pay 12% interest on their business loan this year when the same loan cost them 6% last year, that could translate into tens of thousands or even hundreds of thousands of additional dollars that they must pay back over the life of the loan. Under these conditions, fewer potential buyers will be able to qualify for business loans, and those that can qualify will want to pay less to make up for the increased cost of their loan.

Seller Financing Could Give Sellers the Advantage: Under the current market conditions, sellers who are able and willing to finance at least a portion of their business sale could end up with a much better deal. One obvious advantage of this strategy is that sellers can receive a better interest rate when they finance compared to last year. Another is the ability of the seller to finance creates more flexibility in the deal, allowing the parties to come up with a more creative solution if necessary to complete the sale.

For example, if the parties are at an impasse on the purchase price, the seller could offer an interest rate that is a couple of points lower than what the buyer could obtain elsewhere if the buyer agrees to pay the seller’s price.

With Ongoing Uncertainty, Now Might Be a Good Time to Sell: Going forward, it is impossible to predict how long the current economic instability will continue, or how much worse inflation and interest rates could get. And for business owners who want to sell soon, now may be the best time to put your business on the market.

If your business is fundamentally sound, you can still get a good price in this market. But to ensure that you are in the best possible position when you list your business for sale, it is wise to work with a reputable business broker. An experienced broker will understand the current conditions, and they will help you take the steps necessary to complete a successful sale.

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