Rising interest rates & valuations

searcher profile

February 24, 2022

by a searcher from University of California, Los Angeles - UCLA Anderson School of Management in Tacoma, WA, USA

What’s everyone seeing out there in terms of valuations / multiples? Seeing things level off with rising rates? Is it impacting how you underwrite deals and what banks are willing to lend given DSCR requirements?

Would love to hear how other searches are thinking about this…or not!

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commentor profile
Reply by a searcher
in Alpharetta, GA, USA
In short - no.Because the multiples paid in this space are already so low, interest rates are at all time lows with path forward undetermined, and just generally so much margin for error in ETA - rates will have to go up at least 200 bps before funding costs start to make a difference.Probably need 500 bps before it becomes painful.

To put real numbers on it - I bought my first business at 3x and prime +250 loan (8% at the time).Covid rate cut, that went to 5.5%.Even at 8% I had plenty of breathing room so if we get 250bps rise in prime I am back to where I started.

If prime goes to 750 bps and I am paying 10% then my monthly payment goes up by about 10%.The reason payment is less sensitive to rate increases is that on a 10 year fully amortizing loan, principal is about half the monthly payment.

To wrap it up I’m paying 3x for my second acquisition and my SBA lender is charging prime +225 this time around.
commentor profile
Reply by a lender
from The University of Chicago in Schaumburg, IL, USA
Agreed; the continuing low interest rate environment leaves little room for multiple expansion.Rates would have to significantly increase before there is much of an effect.
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