Business Valuations vs. Rising Interest Rates…Is a 15% Loss of Corporate Value on the Horizon?

2021 was a record year for total completed deals and TEV and it will be a tough year to follow. Q1 2022 deal activity has dipped slightly but business valuations are still edging higher compared to 2020 and 2021…at least for now.

Source DealWare

The Federal Reserve is driven to cooling off the economy and inflationary pressures by instituting interest rate hikes. Hikes that will negatively impact business valuations in the not-so-distant future.For example, let’s look at a capital stack for a $30MM acquisition:

Source DealWare

If the model holds true with a 1.5% increase in the Fed Funds Rate by YE, the enterprise that previously sold for 30MM would now be valued at 25.5MM for a buyer to generate the same ROI. A loss of 4.5MM in company value. An all-cash transaction would generate an even greater reduction in company value to offset the cost of the additional leverage added to a deal.

Without additional pressures aside from the Feds Fund Rate, we don’t anticipate the valuation degradation to be fully borne by strong performing businesses while we’re currently in a highly competitive buying market. That said, other variable factors could exasperate the slide in valuation further: Fed rate hikes beyond the 1.5%, waning of the buying frenzy, the very real prospects of a recession, global geopolitical risk, the pandemic, the global supply chain constraints and the size, strength, industry and competitive advantages your business holds in the market.

To learn how your company can benefit and best position itself within the M&A landscape, call or email me now to receive 3 hours of free consultative analysis. Our analysis offers clarity, based on your objectives, if a full or partial exit, recapitalization, divestiture, acquisition or pre-sale exit strategy provides the greatest benefit to you and your company.

Vercor has been delivering M&A expertise for over 25 years. We serve as a trusted partner to help build long term, iterative strategies that ensure you are positioned to meet your unique personal and financial goals whether it is selling, recapitalizing, acquiring or divesting of a division. Now is the time to evaluate, strengthen, prepare and increase the market value of your company regardless of your timeframe.

Todd Cummiskey

Vercor

704-926-6564

ToddC@Vercor.com