This article are provided for information purposes only, and are not intended as legal advice.


Will higher interest rates in Canada affect the sale of your business?

June 3rd, 2010

Interest rates just increased in Canada by .25%.  May not seem like a lot a large increase but the effect of the increase could affect a number of items.  If interest rates keep rising I believe that there will definitely be an impact on the sale of your business but not in the way that you may think.

 

If interest rates increase, the borrowing ability of people decreases.  If you can afford to pay say $1,000 per month, at the lower interest rates you may have been able to borrow less money today.  For example:  if you can borrow at say 4%, amortize the loan over 25 years, you can borrow approximately $190,000.  If interest rates increased by .25%, you can borrow $5,000 less, if rates go up .50%, you can borrow $10,000 less and if they go up .75% you can borrow $14,000 less.   If you are borrowing a lot more, then you can do the math, they buyers financing ability decreases.

 

Depending on the business that you are selling, some businesses such as retail must be financed by personal debt.  Often, banks will not lend for this type of investment.  If the investor cannot borrow as much money, they will not be able to offer as much money to buy the business.  If they cannot offer as much and the owner of the business is desperate to sell the business, he/she may accept less money just to complete the sale.

 

Will this have a ripple effect, if people start offering less money, will the price of businesses for sale go down when interest rates go up?  I think this will be a factor for small to medium size businesses. Large businesses will not be affected because they have the financial resources to borrow large amount of cash.  This will in my opinion impact the smaller person without a lot of equity looking to buy a small to medium sized business.

 

In light of the financing problem, do you work with the person and possibly offer more of a vendor take back financing to keep your selling price of your business?  Will you need to be more creative to sell your business? I think that sellers may need to be flexible on the amount of down payment that they receive for their business if they want to sell the business to a person who does not have the resources to pay 100% of the purchase price with cash.


Filed under: Selling a business — Gary Landa @ 10:12 am


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