There has been a lot of talk in Canada that interest rates will increase in the summer to the fall. Yesterday, 3 to 5 year mortgage rates increased. Many people use the equity in their home to assist in the purchase of a business. How will higher interest rates affect buyers and sellers of the business?
If the business for sale has a lot of debt, the interest rate will affect profits and cash flow. If the proposed buyer of the business has little equity and uses more debt to finance the business, higher interest rates will mean that the buyer cannot borrow as much money as before. As a result, they will not be able to buy as an expensive business which is for sale. This will mean one of two things, the businesses for sale will take longer to sell or if a seller is in a hurry to sell the business, they will drop the asking price of the business.
From a buyers point of view, do you try to offer a lower price for the business anticipating that there will be an interest rate hike or do you wait until the fall, see that the interest rate hike and the implementation of HST which will drop everyone’s personal disposable cash then make the offer to buy a business.
From an investor point of view, you always keep looking for the perfect business to buy. If you find it buy it because it may not be available at a later date but if you are not sure what you want to buy, are in no hurry to buy, there may be an opportunity to wait a few months to see if some sellers become nervous and start dropping the price of the business for sale.
When buying a business, timing is everything. The question will be how will the implementation of HST and higher interest rates impact the selling price of a business. If you believe that they will have a negative impact, wait and see if you can save some money, if you believe that they will have no impact, look to buy immediately. No one can look into a crystal ball and guess what will happen in the future. You need to guess what way you believe the market will go and make your decisions accordingly.