If you are planning to sell your funeral home or cemetery business, there are many factors to consider. One that is extremely important in 2023 is the rise of interest rates. Our M&A Analyst, Sierra Heil provides her insight on this vital question.
Question: How can I sell my business if interest rates are rising?
Sierra Heil: Over the past 20 years, the deathcare industry has undergone significant consolidation. Many industries have become more focused on convenience and value leading to the emergence of large national chains in an industry that at one time was entirely run by independent local providers. As the baby boomer population ages, many people live outside of the areas they were born or away from younger family members, and families often appreciate when firms offer a wide range of services and options for their loved ones. The culmination of these trends with the current economic environment can present challenges to small, independent operators when the time comes to plan for the succession of their business.
Rising interest rates can have a significant impact on the terms of M&A transactions, especially for small businesses. Interest rates play a crucial role in financing transactions and changes can affect the cost of borrowing and the availability of funding. The prime rate has increased to 7.75%, up from 3.25% just one year ago in March 2022. The increased cost of borrowing can lead to challenges for the pipeline of M&A activity despite the overall consolidation trend.
Interest rates impact transactions between smaller buyers and sellers because they are likely to use loans and lines of credit to purchase or finance operations. One of the primary ways rising interest rates affect smaller businesses is because loans become more expensive in a higher cost of capital environment. Increased cost of capital can limit the number of potential buyers, reducing the overall value of the transaction. When interest rates rise, investors and buyers demand a higher return on investments to compensate for increased risk. This often leads to lower valuation multiples than what would be seen in a more favorable economic environment. Higher interest rates can also lead to a slowdown in the overall economy, reducing the demand for acquisitions as businesses place more focus on operational efficiency and conserving resources. Larger industry players face operational challenges as well, such as local adaptation, staffing, and exposure to macroeconomic trends. However, there are still plenty of opportunities in the market.
Current challenges regarding economic trends can be difficult to overcome, however the deathcare industry is still seeing a high volume of deals, especially as many owners are approaching retirement age. Our team realizes the process of planning for a sale can be an intimidating process. We would love the opportunity to assist with your transaction and ongoing plans for your business.
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