How SBA interest rates impact search?

June 06, 2023

by a searcher from University of Hartford in Maplewood, NJ, USA

New to the community and search... I'm trying to wrap my head around rising interest rates and if this presents an opportunity or a challenge for searchers... For example I suspect most SBA loans are variable therefore is it safe to assume businesses selling factor in current rates (lower valuations to offset high interest), or that isn't a factor? If that is the case and we see rates eventually come down does that present a benefit on the backend where you purchased a business valued at today's rate but would have been valued higher with lower rates? This would be glass half full.

If we look at home buying in comparison my understanding is buyers are no longer able to overpay, and sellers are unwilling to lower their prices so its a standstill. This would be a glass half empty logic.

If this is not the way to think about it, please help me understand appropriate logic - If it's as simple as long as your SDE meet's your financial requirements, who cares, I'm ok with that logic as well.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great question and welcome to the community. From what I am seeing from my customers that are making offers, most sellers are holding prices up because there is still lingering demand from buyers driving prices, even despite higher interest rates. But we are starting to finally see some businesses that have not sold come down in price a bit related to higher interest rates. Unfortunately there is still a lot of money on the sidelines and searchers and private equity funds looking for deals.

The good news if deals work at today's interest rates, when rates do come down in the future the deals in theory should be even stronger. Of course, there is always the risk the economy softens, which is what the goal of higher rates is, which could impact values. But in theory a business should benefit from both lower inflation and lower interest rates in the future.

Reply by an intermediary
from University of Memphis in 5000 Linbar Dr, Nashville, TN 37211, USA

I agree with Brad, as it is normal for sellers to be more responsive to the increased cost of capital then the sellers. The home market impact from increased mortgages rates is the clearest example to use with sellers but it will take time to accept that multiples have to be lower to make most transactions work financially. Many sellers also have the emotional challenge of 2022 being a great year compared to 2020 & 2021 so they expect that "growth" to be sustainable, but what was the financial status pre-covid and what is happening to their end markets that is rate impacted. Earnouts can bridge the gap but without some creative work that eliminates SBA financing. With the high number of owners ready to sell, valuations should have minor corrections by year end. Neither side should suspend their efforts but expect more challenges in closing a transaction.

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