Interest Rates are having a substantial impact on the sale and acquisition of small and mid-sized businesses from a psychological standpoint 🧠 .
Similar to the market for home sales, commercial buyers grew accustomed to interest rates at a certain level, often in the 4% - 5% range over the past decade. (Commercial rates are almost always higher than residential rates).
Case in point: I have a commercial loan on a building locked in at 4.25%. In early 2021 when rates hit their lowest point, I was annoyed that I wasn't at a slightly lower rate.
However, 4.25% is a great rate for Commercial Real Estate in today's market - it's all relative to what we've been exposed to.
Recently, I've talked with many Buyers looking to acquire businesses. Many don't want to borrow at 7% or 8%. However, it still might make sense to borrow at these higher rates...
Many of the businesses listed for sale have strong financials or have the potential to be excellent performers with a bit of strategy and execution in the areas of Marketing and Operations. If you don't look at the upside, you may miss opportunities that could ultimately be your most profitable investments.
For example, if you can borrow at 7% on a business with a profit margin of 25%, it very well could be an excellent investment. Good questions to ask yourself are: "Where do you fall on this spectrum? What level of Return would you need to feel comfortable financing at these higher rates?
In addition, if entrepreneurship is in your DNA, you may think even further down the road. Do you believe rates will drop in the future? If so, the margin on the example above could get even better (Of course, there's a risk they can get worse) as refi possibilities begin to reappear. It's important to consider what the business could look like after you've grown it and secured refinancing at a more ideal level.
However, if you're still uneasy about borrowing under the current circumstances, another strong option that's being commonly utilized is Seller Financing — asking the Seller to be the bank.
Savvy Sellers tend to build in competitive Interest Rate terms, but there are motivated Sellers out there and many times they will extend favorable terms in exchange for a Buyer accepting their offer price.
So, if you're in the market to buy a business, be sure to assess the potential upside of the opportunity you're looking at to get a full financial picture.
To your success,
Jason Huett Collaborative Commercial, LLC. Founder/CMO
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