Fed Chairman Ben Bernanke is once again testifying before Congress, largely defending his current policy and generating tons of press coverage. Most of it focuses on the impact on the stock and bond markets, large banks, and U.S. economic growth, all of which affect the small business owner indirectly, but the coverage misses the direct impact.
Interest rates have been held at historic lows by the Fed for the past few years. Eventually they will rise, most likely accompanied by inflation. As a business owner, rising interest rates means your cost of capital increases. Likewise, the cost of financing an acquisition is higher.
If you are a business owner closing in on retirement, then you need to monitor this activity carefully. Interest rates determine what a buyer can afford to pay for a business. Lower rates mean a lower monthly payment. When a borrower talks to a bank or other lending institution about buying a business, they discuss the value of the business in terms of its debt servicing capabilities – in other words, the size of loan payment a business can afford using existing cash flows.
Today, SBA loans come with an interest rate of approximately 6%. If rates were to rise to 8%, a borrower can expect the monthly loan payment to increase by $1,000. This can be prohibitive to some borrowers, potentially causing them to either walk away from the deal or lower the price.
As an owner nearing retirement, the simple solution is to continue growing your business; however, if you own a mature business in a slow growth industry, perhaps you should revisit your anticipated sale date and consider exiting earlier in order to lock in a better deal for both you and the new owner.