Interest Rate Hike and Middle Market Business Owners

Interest Rate Hike and Middle Market Business Owners

By Kim Levin

August 17, 2015

Interest Rate UpWatercooler talk this spring has been centered on a potential rate hike by the Federal Reserve. It has been nearly nine years since we have seen an increase in rates and we’ve been operating in a near “zero” interest rate environment since late 2008. A rate hike, even a nominal one, will have far reaching implications for investors large and small, at home and abroad. When it arrives, whether later this fall or early next year, the M&A markets will indeed feel the effects of a change in interest rates.

The Federal Reserve has the power to influence the economy by increasing or decreasing the money supply. If the goal is higher rates, they remove money from circulation. When the money supply is reduced, the laws of supply and demand take over and rates begin to climb. When rates increase, investors who look for safe havens for cash will earn more and anyone who borrows money will pay more.

Both strategic and financial investors borrow a portion of the money they use to buy a company. In recent years, the use of leverage has been on the rise. Before making a specific acquisition, the investment team decides in advance what the target rate of return will be. If they pay more for the leverage portion… by necessity they will pay less for the asset itself, so that the overall rate of return goal can be met.

What does an interest rate hike mean to middle market business owners selling a company? Some have theorized that there has already been a “discount” built into asset pricing that will offset any rate hike. But, we’re not necessarily convinced. If you can get to market and close your deal before the Fed moves…that may be your best move.

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