As a start-up founder, you need to keep a lookout for the rise in interest rates. This will impact your acquisition deals and define the net value of your start-up. In this article, we will talk about what impact this will have on mergers and acquisition deals.
Rising interest rates can have a significant impact on mergers and acquisitions (M&A). When interest rates rise, the cost of borrowing increases. It can make it more expensive for companies to finance merger and acquisition deals. Companies may be less willing to take on the added debt required to fund the acquisition. Rising interest rates can also lead to increased market volatility. It can make it challenging for companies to value potential acquisition targets with precision.
When interest rates are low, companies can borrow money at relatively low rates. This makes it easier and more affordable for them to fund mergers and acquisition deals.
For example, let’s say a company is considering acquiring another firm for $100 million. If interest rates are low, the company may be able to borrow the money needed to fund the acquisition at a relatively low rate. For example, the rate of interest is 5%. This would result in annual interest payments of $5 million. Now assume that the interest rates rise to 10%. As a result, the company’s annual interest payments would increase to $10 million. This would make the acquisition more expensive. It could potentially make it less attractive to the company.
When interest rates are low, companies can use discounted cash flow (DCF) analysis. It is done to estimate the value of a potential acquisition target. This involves forecasting the target company’s future cash flows and discounting them back to present value using a discount rate.
When interest rates rise, the discount rate used in DCF analysis also increases. It can result in lower present value estimates for the target company. This can make it more difficult for companies to determine whether an acquisition is a good value or not.
Further, rising interest rates eat up equity returns for investors. They have to think if they really want to go further with the expensive deal or not. The decision process might take a lot of time. One of the major causes of unnecessary rising interest is often because of inflation. Investors then have less time to value, and they need to fasten the process to achieve their profit targets with a greater or higher internal rate of return. So start-up owners are unable to quote the right price for the shares they want to dilute in exchange for the other benefits of the acquisition.
Generally, with an increased rate of interest, start-up owners have another pressure to raise their profit margins. However, they are unable to raise the pricing for fear of coming across as too expensive to the investor. It further leads to margin degradation of credit and valuation quality for that start-up.
Conclusion
A rising rate of interest is an opportunity for risk-taking investors. Start-up owners have to pitch their companies and shares in front of the right group of investors. Otherwise, there will be an ever-widening gap between the valuation of a company and the offers promoters or co-founders receive from the industry leaders. As a result, company owners can expand the margin and shift the burden to the other vendor in line.
Otherwise, they must depend on the automation of resources for greater business impact and growth. With the magnitude of the business impact, buyers will feel motivated to offer a favorable price, despite the changing interest rate scenario in the market. If you have any confusion regarding the deal to crack, first, you must be sure about the valuation of your start-up. Get it valued by certified business advisors and start this awesome journey to create a league and leave an impact with your start-up offerings like never before.