By Chris Stark and Craig Berry, Stark Capital Solutions

If you’ve been keeping up with the news lately, you’ve probably seen discussions over rising interest rates and the Federal Reserve’s recent rate hike of 25 basis points in March, then another 50 basis points in May. With more rate hikes imminent, we were recently asked by one of our bank partners how the rising rate environment impacts company valuations.  

At Stark Capital, our two decades of industry involvement and experience has put us in a position where we can look back at data and trends to draw conclusions about the future. Now that rising interest rates are happening, we can dive into what that means for company valuations. 

What does the data say? 

Overall, valuation multiples have stayed incredibly consistent between 8-12xs cash flow over the last few decades. During times of rising interest rates, there has not been a correlation to lower valuations driving down the average deal multiple. Historically, as rates increase, we tend to see a healthy M&A market with numerous transactions being completed.   

Interestingly, however, we do tend to see the M&A market slowdown and a softening on the high-end of the valuation range when interest rates are decreasing. 

Why does this happen? 

The Federal Reserve increases rates when the economy is booming to help slow inflation. During these times, buyers are more aggressive and typically have more money set aside from increased profits. Similarly, sellers are more apt to sell when the economy is thriving and profits are high.   

However, if the increased interest rates end up stalling the economy and we hit a recession, buyers and sellers alike tend to pullback, resulting in a slowdown in the number of transactions completed.   

What should you do? 

Based on data and historical trends, there’s currently no reason for concern as company valuations are strong, and the M&A market is very healthy. However, if the government ultimately succeeds in slowing down inflation and it causes a recession, there will eventually be a noticeable effect.  

That is why we believe now is a better time than ever to take advantage of the market. 

At Stark Capital Solutions, we care about being on top of shifts in the industry to help us better serve our clients.  If you would like to discuss this topic further, reach out to us today by calling us at 317-546-6038 or email cstark@starkcapitalsolutions.com.  

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