Inflation and the attempt to offset it with higher interest rates impact almost every area of the economy and people’s daily lives. In the world of corporate sales, where leverage and transaction financing play a critical role, one would think that the potential repercussions of accelerating interest rates would be enormous and disastrous. While I understand this reasoning, 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, no matter the state of the economy.
Business buyers just have to get used to a new base. The low interest rates we’ve seen over the past few years haven’t always been the case, and businesses haven’t stopped selling. Anyone who wants to buy or sell a business has to block out the noise, adapt and adjust their thinking.
Retail buyers don’t be dismayed
For individual buyers who can finance through a combination of SBA-type loans or seller financing, increasing a few percentage points will have a marginal effect on cash flow. Even if the rates are skyrocketing, if the company cannot service the debt adequately due to the rising cost of servicing the debt, it’s probably not a good deal to buy, regardless of interest rates. There’s also the leverage a buyer can now have with a seller to negotiate lower sale prices, longer tickets, and even a short-term holiday from ticket payment once they take the relay.
Private equity firms must buy companies
For many institutional buyers such as private equity firms, they have no choice; they have to deploy capital. If they don’t invest their funds, they have to return them to their investors, and I guarantee that’s not happening. In this sector, SEs will adapt as they always do. They will likely mine less, which means more equity in each trade, and this can serve to reduce multiples from their current insane levels. In addition, the low interest rates of recent years have led to over-indebtedness. This has led many private equity firms to make bad investments in their rush to close deals and, in some cases, forego their usual detailed underwriting in their rush to close deals when deal flow is tight.
Sellers may have an advantage
Sellers who offer sale balance financing will now be able to get a higher rate, or there may be an even better option to use the higher rates to close a deal. In other words, offer a potential buyer a lower rate than the prevailing rate to close the deal. A seller can even use this strategy to obtain a higher purchase price by offering a buyer better terms of sale. Use the approach of “I’ll take your terms and you pay my price”.
That’s how you look at it
Having seen the ups and downs of business sales over three decades, to me, the current hysteria in the marketplace is nothing to worry about. Transactions will continue to be concluded. Creative sellers will use the market to their advantage. Buyers who don’t adjust their thinking will be left on the sidelines as they always are, whether the economy is booming or floundering.