How Inflation Could Affect the Sale of Your Business

The last year has seen unprecedented inflation that consumers are experiencing everywhere. You’ve probably noticed that a trip to the grocery store suddenly hits harder, and that the prices of some items may have even doubled or tripled. Working with a business broker to manage the M&A process may help ease some of the effects of inflation on the sale by offering assurances to the buyer and keeping the transaction moving smoothly forward. But every sale now has to grapple with the realities of massive inflation. Here’s how it might affect your merger or acquisition. 

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Rising Interest Rates 

Rising interest rates make credit more expensive, and more difficult to access. This may price some buyers out of the market altogether, especially in the lower and lower middle markets. This could mean fewer bids, but it might also mean the bidders you do have are better qualified. Even so, they’ll be more skeptical of high asking prices and more inclined to negotiate down to a more affordable rate. The days of rapidly accelerating prices are over, at least for now. 

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Higher Prices, Lower Multiples

While inflation may have driven sale prices somewhat higher, the actual purchasing power of the increased sale amount remains dubious. Moreover, over the last year, sale price increases have slowed and may not keep pace with inflation. Lower multiples are more common thanks to an uncertain economic environment coupled with skyrocketing interest rates. The difficult truth is that your business may just be worth less now, or you may have to work much harder to earn what you believe to be its value. The best and most well-run businesses will still face a favorable market, but struggling businesses may have to accept some losses. No matter where your business falls on the continuum, now remains the best time to sell if inflation continues to rise. 

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Increased Uncertainty 

When the COVID pandemic hit, everyone thought real estate would tank. Instead, it soared into the stratosphere. No one can predict how this latest round of economic challenges will affect M&A, let alone the broader economic environment. This uncertainty has made buyers more rigorous during due diligence, and less willing to pay inflated sale prices. 

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The uncertainty extends beyond the buy side of an M&A transaction, though. In some sectors, pricing uncertainty and economic unpredictability are slowing growth and alienating customers. Buyers will be keen to assess how inflation affects your daily operations, as well as your customer base. If you need to compromise your bottom line to keep pricing consistent and sustain your customer base, this may factor into the transaction. 

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You can offset some of this uncertainty with a skilled business broker or M&A advisor, who can help you present your business in the most appealing light, negotiate on your behalf, and help with determining appropriate value. With enough time in the lead up to the sale, your broker may even be able to identify areas you can improve to increase value.