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


Will increasing interest rates affect the price of your business for sale?

April 14th, 2010

Mortgage interest rates are starting to rise in Canada.  It is widely expected that the prime interest rate will increase in the summer.  How does this impact your business for sale?  Will there be any impact of higher interest rates?

 

I believe that there will be two impacts of higher interest rates.  Depending on how high interest rates will go, the Canadian dollar could appreciate more to the US dollar.  If the Canadian business for sale sells a lot of products to the US, the profit margins of the Canadian business could drop.  As a result, the historic profit of the past may be eroded in the future.  Depending on how sensitive the product that they are selling to the US is, there could be a loss of customers.  If you are manufacturing and selling to for example dollar stores in the US, a $.01 change in price could affect the sales.  If you are buying raw materials in Canadian dollars, manufacturing them in Canada then exporting to the US, if prices rise in Canada and selling prices drop, there could be a significant impact on the profitability of the business.

 

If the investor is looking to borrow money to buy a business, if he/she wants to put a mortgage on his house, there could be two impacts.  The higher interest rates means that he may be able to borrow less than before because he can only afford a certain monthly payment.  If interest rates go up, many first time home buyers may not be afford a house, this will then affect the people trying to move up to their second and third house etc.  This may affect the chain of house purchases.  If there are fewer buyers because people cannot sell their house, that means that housing prices may drop.  If housing prices drop and interest rates go up, people may be able to borrow less money on the equity of their home.  If they borrow less money, will they be able to afford your business for sale?  Will investors start to offer lower prices because they no longer can afford the old price?

 

In summary, do you sell now before anyone realizes that increased interest rates, increasing strength of the Canadian dollar may have an impact on the profits of your company for sale and also for the ability of buyers to be able to purchase your business?


Filed under: Selling a business — Gary Landa @ 10:25 am


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