In the 1980s, borrowers faced interest rates upwards of 18%. In the last few years, they were fortunate to have gotten rates closer to 3%, but the Federal Reserve has begun to increase them. One of the reasons for this is that the consumer price index (CPI) has rapidly increased over the past year. Though many openly discuss interest rates in the context of home sales, it is essential to look at how they impact people buying or selling businesses.
The Federal Reserve has been raising interest rates in large part to slow inflation. That increase in rates obviously raises the cost of borrowing, meaning that purchasing a business becomes a more expensive prospect if one intends to use leverage instead of paying cash. Interest rates impact more than just the cost of borrowing. The latest news shows that consumers are decreasing discretionary spending, and that means, depending on your industry, you may see a decrease in sales. If you are a business that relies on credit for operational capital, higher interest rates make running a business more expensive.
Though the economic consequences of increased interest rates have a broader impact than we can address here, suffice it to say there is the potential that buyers and sellers of businesses are likely to be impacted by an increased cost of borrowing. Those who have significant cash reserves may be in a better position to buy attractive businesses now, meaning those who use leverage for acquisitions are in a difficult competitive space. More to the point, if you have decided that your succession plan involves the sale of equity interests to insiders or a third party, higher rates mean that the cost of your succession plan will increase, placing more pressure on both buyers and sellers in negotiations. Even seller financing at IRS-mandated minimum interest rates are impacted by the Fed’s actions.
Beckemeier LeMoine Law Exist To Support Your Business
Interest rates remain at historically low numbers, and there are signs that inflationary pressure and the costs of borrowing are easing. Regardless, regular and timely planning is critical for business owners and for those considering the purchase or sale of a business. The lawyers at Beckemeier LeMoine can assist you as you think about the purchase or sale of a business, or if you are thinking about succession planning and wanting to identify and implement a potential succession or exit strategy. For more information about how we help you and your business, contact our offices to schedule a consultation with one of our skilled attorneys.