Inflation and the attempt to offset it with higher interest rates affects almost all sectors of the economy and people’s daily lives. In the world of business selling, where leverage and deal financing play a vital role, you would think that the potential impact of rising interest rates would be huge and catastrophic. While I understand that thought, I disagree. Of course, there will be the usual naysayers who decide they can’t go ahead and buy a business now because interest rates are rising. These are almost certainly the same people who can’t pull the trigger to buy a business, regardless of the state of the economy.
Business buyers just need to get used to a new base. The low interest rates we’ve experienced in recent years haven’t always been the case and companies haven’t stopped selling. Anyone looking to buy or sell a business has to shut out the noise, adapt and change their mindset.
Block the sound!
Individual buyers are not dismayed!
For individual buyers who can finance through a combination of SBA-style loans or seller financing, the increase of several percentage points will have a marginal effect on cash flow. Even if rates skyrocket, if the company can’t adequately service the debt due to the higher cost of debt service, then it probably isn’t a good company to buy regardless of the interest rates. There is also the leverage that a buyer can now have with a seller to negotiate lower sales prices, longer notes, and even a short-term break from paying the note once they take over.
Private equity firms must buy companies
For many institutional buyers, such as private equity firms, they have no choice; they have to put in capital. If they don’t invest their money, they have to give it back to their investors, and I guarantee you they don’t. In this sector, PE will adapt as always. They will likely have less leverage, meaning more equity in any deal, and it could serve to drive down multiples of their insane current levels. Furthermore, the low interest rates of recent years have led to excessive leverage. It has led many PE firms to make poor investments in their rush to close deals, and in some cases forego their usual granular underwriting in their rush to get deals done when deal flow is tight.
Sellers can have an advantage
Sellers offering a balance of sales financing can now get a higher rate, or there may be an even better option to use the higher rates to close a deal. That is, offer a potential buyer a rate lower than the prevailing rate to close the deal. A seller can even use this strategy to get a higher purchase price by offering a buyer better deal terms. Use the approach of “I take your terms and you pay my price†
It’s how you look at it
Having seen the ebb and flow of corporate sales over three decades, the current hysteria in the market is nothing to worry about for me. Deals will still be made. Creative sellers will use the market to their advantage. Buyers who don’t change their mindset will be left on the sidelines, as always, whether the economy is booming or faltering.