There’s no question that the world of business sales hinges on the leveraging and financing of deals. Considering this, you’d think that the higher interest rates we’ve been experiencing would be a huge deterrent to buyers.
However, that’s not necessarily the case.
If you’re considering selling your business but are concerned about rising interest rates, read on to learn why you don’t need to be worried about selling in this increasing rate environment.
Historically, Interest Rates Are Still Relatively Low
While an initial look at rising interest rates can be scary (to buyers and sellers alike), it’s important to remember that, historically, we’re still seeing relatively low interest rates.
Although interest rates are higher than they’ve been in many years, they’re still a far cry from the highs of the early 80s, when rates reached an all-time high of 20%! In fact, the extremely low interest rates we saw in recent years were more of an anomaly.
Plus, the old adage “what goes up, must come down” exists for a reason. Inflation has already begun to slow, and, eventually, interest rates will follow. So those buyers who are turned off by a rising rate environment won’t be out of the game for long.
For Individual Buyers, a Few Percentage Points Won’t Make a Huge Difference
For individual buyers who get their financing through SBA-type loans or seller financing, the relatively marginal increases we’ve seen won’t make a huge difference on their cash flow.
The truth is, if a business can’t adequately service the debt because of the increased cost, it’s probably not in a buyer’s best interest to buy, regardless of interest rates. While this may cause some buyers to lower their offering price to account for the added interest rate burden, it’s unlikely they’ll be completely deterred from buying.
Plus, there are lenders out there who aren’t tied to the prime lending rate. A buyer working with one of these lenders won’t be as concerned about interest rates.
Private Equity Groups Have To Invest Their Capital
Institutional buyers like private equity firms exist to invest their capital. They really don’t have a choice in the matter: If they don’t invest their money, they have to return it to their investors (with a handsome return)…and we all know they don’t want to do that!
PEGs typically have to return undeployed capital within a relatively short window of time (usually less than 10 years). That means they’re nearly always under pressure to acquire and grow businesses.
In the face of rising interest rates, PEGs will adapt as they always do, and they’ll continue to buy businesses.
Cash Buyers Aren’t Concerned About Interest Rates
While cash buyers aren’t the norm, they’re definitely out there.
And for buyers who aren’t dependent on financing, interest rates are a non issue. In a cash transaction, no interest is being paid to acquire the business anyway. So interest rates should have no effect on the acquisition.
When It’s Time To Sell, It’s Time To Sell
Regardless of what the market’s doing, sometimes there are family, health, or financial issues that dictate it’s time to sell your business. And in those cases, it’s always the right time to sell.
In any market, a certain degree of uncertainty is inevitable. You can never know the perfect time to sell stocks or your home…and the same is true of selling your business. The best way to navigate this uncertainty is to keep an eye on the big picture in the context of your industry and maintain a lean, efficient company.
An added bonus of an increasing rate environment for a seller is that you’ll benefit from that higher interest once you reinvest the proceeds of your sale.
OIB Can Help You Sell in an Increasing Rate Environment
Having an expert business broker by your side gives you yet another reason you don’t need to worry about selling your business in a rising rate environment. That’s where the team at OIB comes in.
At OIB, we’re experts in business valuation, deal negotiation, and navigation of a business sale—in any environment. We’re also adept at helping connect our clients with the right financing: For example, we’re continually meeting with lenders whose cost of lending is not tied to the Prime Lending Rate, making rising rates less of an issue.
If you’re thinking about a business sale this year, OIB would love to partner with you to get your business sold. Contact us today to discuss your needs and get started.