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Rising Interest Rates Affect...

How Rising Interest Rates Can Affect the Value of Your Company

It is no secret that inflation and its ripple effects are sweeping across our nation with no signs of stopping anytime soon. The cost of everything in our day-to-day lives has skyrocketed, and the costs associated with running our businesses are no different.

In an effort to slow the impact of the current inflationary climate, the U.S. Federal Reserve Bank (the “Fed”) has moved to increase interest rates for the first time in 4 years (with additional rate hikes expected well into 2023). Is there a connection between rising interest rates and the value of your business?

We believe there is, and it’s in your best interest to pay attention to the rates of interest!

Interest Rate Basics

The Fed was created to maintain balance in the U.S. economy. Its mission is to maximize the country’s employment levels, help stabilize prices, and regulate long-term interest rates. In order to do that, they frequently make adjustments to short-term interest rates.

Interest rates represent the rate of return an investor can expect to be paid for taking a risk with their money on a particular business or financial product. It is essentially what it “costs” to have someone invest their money.

How Interest Rates Affect The Rate of Return

The required rate of return on stocks is based on several factors. First, the value of U.S. Treasury bonds is a fixed rate for a piece of the country’s debt security. They are guaranteed by the “full faith and credit” of the U.S. government.

Added to that rate is an additional factor known as a “risk premium.” People who invest in stocks expect a greater return than a Treasury bond because the companies they are investing in are, in many ways, unpredictable. In return for taking on greater risk, they want a rate of return. So the combination of the Treasury bond rate and an added risk premium (which will vary depending on the volatility of the company/industry in question) is what gives us “required returns.”

How Interest Rates Affect Valuation Multiples

At Southard Financial, we are in the business of providing valuations for companies looking to sell or individuals looking to buy. When we come on board, we go through every aspect of the business in question with a fine-toothed comb. But what everyone wants to know at the end of the day is: “what is the required rate of return and, in turn, the multiple?”

It is simply a form of analysis that compares one company to similar competitors using standardized methods. Once that number is determined, buyers and sellers can quickly determine whether or not they’d be getting a good deal by investing in this particular business.

Many people don’t realize just how much interest rates can affect valuation multiples. While it’s not a direct correlation, they definitely have an impact on how much a business is worth.

1. Interest Rates Affect How Spending Decisions Are Made

Rising interest rates often impact how well the company can operate. Leaders make different planning and spending decisions when interest rates are low compared to when they are high.

In a season like the one we are currently experiencing (rising interest rates), business owners tend to be much more cautious. They may hold off on larger capital improvements, product lines, or expansion projects because rising interest rates usually signal a more volatile economy. When uncertainty enters the marketplace, business leaders usually tap the brakes. Doing so may shield the company from some negative impacts of a bad economy, but it doesn’t allow for the growth and smooth operations that lead to higher valuations either.

2. Interest Rates Affect Interest Expenses

If a company has borrowed money to fund its operations, the costs of that debt go up when interest rates go up. Suddenly, that money becomes more expensive. The more money a company must spend on interest payments, the fewer profits it can realize. That can affect its value significantly.

3. Interest Rates Affect Customer Spending Habits

When interest rates rise and consumers’ dollars don’t stretch quite as far, they are forced to decide between spending them in one place versus another. If your company isn’t in the business of selling essential products or services to those consumers, more than likely they will decide to delay doing business with you.

Fewer customers buying what you sell leads to less revenue and fewer profits. That, in turn, directly affects the value of your business.

When Interest Rates Threaten Your Company’s Value, You Need a Guide You Can Count On

For over 30 years, Southard Financial has been helping business owners with accurate business appraisals and transaction advisory services. We’ve worked with hundreds of companies across dozens of industries.

Privately held and publicly traded companies of all sizes and types rely on our team of experts to guide them through maximizing their company’s worth. Schedule a call today to learn more about how we can help you during these uncertain times too!

Recent Activities

  • Southard Financial was proud to be a Bonze Sponsor of The ESOP Association Annual Conference in 2021, 2022, and 2023

  • Southard Financial was proud to be a Platinum Sponsor of the New South Chapter of The ESOP Association in 2020 and 2021

  • Southard Financial was proud to be a Member Bank Sponsor of the Ole Miss Banking & Finance Symposium in 2017, 2018, 2019, 2022, and 2023

  • Southard Financial was proud to be a Co-Sponsor of the National Center for Employee Ownership ESOP Nuts & Bolts Event in 2018

  • Southard Financial was proud to be a Corporate Sponsor of the Mid-South Minority Business Council in 2017 and 2018

  • Dave Harris attended The ESOP Association Annual Conference in 2018, 2019, 2022, and 2023

  • Dave Harris attended The ESOP Association Professionals’ Forum in 2019, 2020, 2021 (virtual), and 2024

  • Dave Harris attended the National Center for Employee Ownership Annual Conference in 2015, 2016, 2018, and 2019

  • Mark Orndorff and Matthew Jakes attended the National Center for Employee Ownership Annual Conference in 2017

  • Southard Financial attended the National Center for Employee Ownership Annual Conference in 2020 (virtual) and 2021 (virtual)

  • Mark Orndorff attended The ESOP Association Professionals’ Forum in 2023

  • Southard Financial facilitated the sale of Flint Hydraulics to Hydraquip, Inc.

    Southard Financial facilitated the sale of Flint Hydraulics to Hydraquip, Inc.
  • Southard Financial facilitated the sale of Memphis' own Cooper Glass Company

    Southard Financial facilitated the sale of Memphis' own Cooper Glass Company
  • David A. Harris and Mark A. Orndorff spoke at the 2019 Annual Fall Conference of the New South Chapter of The ESOP Association

    David A. Harris and Mark A. Orndorff spoke at the 2019 Annual Fall Conference of the New South Chapter of The ESOP Association held in Orlando, Florida on October 16-17. They gave a presentation titled “Can Employees Really Impact Company Value?”

  • Southard Financial facilitated the sale of Memphis' own TOPS Bar-B-Q chain

    Southard Financial facilitated the sale of Memphis' own TOPS Bar-B-Q chain
  • David A. Harris and Matthew L. Jakes spoke at the 2019 Spring Workshop of the New South Chapter of The ESOP Association

    David A. Harris and Matthew L. Jakes spoke at the 2019 Spring Workshop of the New South Chapter of The ESOP Association held in Atlanta, Georgia in February, 2019 on the topic of “Valuation Appraisal Checklist – 10 Things Your ESOP Appraiser Should be Doing”

  • David A. Harris spoke at The Fall ESOP Forum of the NCEO

    David A. Harris spoke at The Fall ESOP Forum of the NCEO (National Center for Employee Ownership) held in Albuquerque, New Mexico in October, 2018 on the topic, “Communicating Valuation: Tools, Tips, and Examples”.

  • Southard Financial negotiated the sale of and was the exclusive financial advisor to Southern Systems, Inc.

    Southard Financial negotiated the sale of and was the exclusive financial advisor to Southern Systems, Inc.
  • David A. Harris spoke at the 2018 Annual Fall Conference of the New South Chapter of The ESOP Association

    David A. Harris spoke at the 2018 Annual Fall Conference of the New South Chapter of The ESOP Association held in Birmingham, Alabama in September, 2018. He led a workshop called “The People’s Roundtable Interactive Workshop – A series of ‘Build to Last’ activities that focus on developing successful communication and team building programs for employee owners of all generations.” Speakers included Dolores Lawrence, Blue Ridge ESOP Associates; Lindsay Baublitz, SCandH Capital; David Harris, Southard Financial LLC

  • Mark A. Orndorff spoke at the ESOP Nuts & Bolts Seminar of the NCEO

    Mark A. Orndorff spoke at the ESOP Nuts and Bolts Seminar of the NCEO (National Center for Employee Ownership) held in Indianapolis, Indiana in August, 2018 on the topic of “What’s Your Company Worth? – ESOP Valuation.”

  • Southard Financial helps Transnetyx expand with growth capital

    Southard Financial helps Transnetyx expand with growth capital
  • Mark A. Orndorff spoke at the American Booksellers Association Winter Institute

    Mark A. Orndorff spoke at the American Booksellers Association Winter Institute 2018 held in Memphis, TN in January, 2018 on the topic of Succession Planning titled “What is Your ‘End Goal’?”

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