How Rising Interest Rates Will Impact Business Owners Wanting to Sell Their Company

By Generational Equity

12/17/2016

Dallas, Texas, December 16, 2016 – Wednesday’s decision by the Federal Reserve to raise interest rates should be a wake-up call to those planning to sell their businesses over the next few years, according to M&A professionals with Generational Equity. Generational Equity provides mergers, acquisitions, strategic growth advisory services, and information for privately held and family-owned businesses to exit their companies successfully.

“Wednesday's modest increase in interest rates is not likely to have an immediate impact on the M&A market,” said Dave Heymann, senior merger and acquisitions advisor at Generational Equity. “If this is the beginning of a trend in interest rate hikes, as many believe it is, then the value of some businesses eventually will decrease as the cost of financing increases.”

“With interest rates still at historic lows this is an ideal time to begin planning an exit strategy because of the lead time necessary for due diligence, market research, negotiations and financing a transaction,” notes Heymann. “The opportunities created by record low interest rates are likely to diminish over the next few years if the Federal Reserve continues the trend of increasing rates.”

The good news for business owners planning an exit strategy is that slow growth in the economy and low returns on other investments mean that many businesses are turning to acquisitions for additional growth. “Many companies are choosing to include M&A as an integral part of their strategy,” according to the report U.S. Executives on M&A: Full Speed Ahead by KPMG. Entering new lines of business and expanding the customer base or geographic reach were some of the most common reasons by executives surveyed for the report.

“For now, low interest rates provide a real window of opportunity for business owners to cast a wide net for potential buyers and sell when the market is ready,” said Heymann. “This process takes time and by 2018 interest rates may have moved enough that they become more of a factor in the market.”

“While companies with good liquidity may not be impacted by higher interest rates in their daily operations, virtually every deal will be significantly impacted if the cost of financing changes the potential ROI,” said Heymann. “When interest rates rise, buyers have other options for deploying their capital so they will have less dollars allocating to acquisitions. In addition, buyers place varying values on a potential acquisition based in part of how they will finance the deal.”

“So the goal is not just to identify a single potential buyer but rather create an auction among several potential buyers and if interest rates continue to rise, identify buyers for whom this is less of an impact.”    

By Carl Doerksen, Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.