Acquisition Interest Rate Impacts?
October 07, 2022
by an intermediary from University of Memphis in 5000 Linbar Dr, Nashville, TN 37211, USA
While acquisition rates are set by individual lenders we have seen rates up 1% - 2 % in the past two months. Not a direct correlation to the Fed increases but it is having an impact on buyer's buying power. Curious what others are seeing regarding rates in general and if you see impact on seller's valuation expectation.
from The University of Chicago in Chicago, IL, USA
A: Rate change from 6% to 8% reduces value by 6% to maintain IRR of 35%.
B: If Seller insists on same price as before (i@ 6% interest rate), then buyer's IRR will drop from 35% to 31.5%
Both A & B above assumed 5% growth.
C: If rate changes from 6% to 8%, and growth reduces from 5% to o%, then value should reduce by 15% to preserve 35% IRR.
There are many, many variables in valuation, transaction structure, forecast, assumptions at exit, etc. Above is just one set of impact analysis. Do you own analysis for the specific deal you are working on.
Putting aside the analytics, the real problem is Sellers and Buyers have opposite reaction to market swings:
Sellers are slow to change in down market, but fast to change in up market.
Buyers are fast to change in down market, but slow to change in up market.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA