How Your Company Valuation Is Affected By Rising Interest And Inflation Rates

On 16 December 2021, the Bank of England raised the Base Rate for 0.1% to 0.25% which marked the start of 13 consecutive rate rises as the Bank attempts to control inflation and bring it back down to the 2% target, with many forecasters predicting further increases still.

This then raises the question for many business owners considering an exit, what does this mean for the value of my business?

At its most basic the "Enterprise Value" of a business, the value ignoring any surplus assets or debts, is a function of the cash generated by a business and the expected rate of return required by the buyer.

With interest rates rising this has 2 main effects:

1. Investors expect to achieve a better rate of return as the return they could make without taking much risk is greater and the future cash earnings, of the business they would buy, adjusted for today's money value, are diminished to a greater degree by the effects of inflation. This increases the buyers required return on their investment and hence reduces the company's value.
2. Many business acquisitions are funded entirely or in part by debt finance, with the increase in rates funders tightening their credit policy, reducing the availability of debt to fund acquisitions.

These factors are born out by the records of transactions between the years 2021 and 2022. The Marktomarket Micro Cap Index shows a difference in multiples of EBITDA paid for companies between 2021 and 2022 reduce for 7.2x to 6.2x correlating with the increase in Base rate and inflation. These figures represent transactions with values of between £2.5m and £10m.

The year-on-year differential increases further still for transaction values of between £10m and £50m whereby 2021 saw multiples of 9.2x EBITDA reducing to 7.7x EBITDA for 2022.

There hasn't been a more crucial time in recent history for business owners to seek professional help to maximise the company values.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.