What Yesterday’s Fed Announcement Means for Small Business Owners

Yesterday, the Federal Open Markets Committee (FOMC) announced that it expects interest rates to remain at exceptionally low levels through late 2014.  This is excellent news for both buyers and sellers of small companies.

Interest rates are a key factor in determining what a buyer can afford to pay for a company.  Lending institutions value companies based on their debt servicing capabilities i.e. the size of loan that can be repaid using the existing cash flows of the business.  A lower rate yields a lower monthly payment, and since principal and interest tend to have an inverse relationship, lower interest rates enable the buyer to be able to take out a larger loan.  Thus, buyers can be more competitive in the bidding process, and sellers can maintain better pricing power for their companies.

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