The Australian business sales market is experiencing a significant change in 2023, driven in part by rising interest rates. As the Reserve Bank of Australia and global financial institutions adapt to economic shifts, entrepreneurs, investors, and business owners must stay informed and agile to make the most of the evolving landscape. 1. Buyer’s or Seller's Market? As we get closer to the end of 2023, the sales market continues to favour businesses with solid earnings and sound fundamentals. Businesses experiencing challenges to their fundamentals, particularly gross profit stability, are in high supply, putting downward pressure on valuations.
2. M&A Activity is on the Rise: Merger and acquisition (M&A) activity remains a driving force behind business sales. Large corporations, particularly in tech, healthcare, and finance, are actively seeking acquisitions to bolster their portfolios. This has a ripple effect, encouraging smaller businesses to consider selling or merging with more prominent players providing opportunities for growth and synergy.
3. Impact of Rising Interest Rates: Historically, low rates in Australia have encouraged entrepreneurs and investors to seek financing for acquisitions and expansion. However, as rates gradually rise, this environment is transforming.
Rising interest rates mean the cost of borrowing is going up. This can affect business valuations, especially for companies heavily reliant on debt financing. As a business owner or seller, it's crucial to understand how these rate hikes could affect your business's attractiveness and potential buyers' ability to secure financing.
Vendor Finance is being offered more frequently to demonstrate confidence in the business and assist the right buyer in completing the transaction. Vendor financing can be a very effective means of achieving the highest price and result in substantial CGT liability savings if structured correctly. Sellers seeking specialist CGT advice often realise Vendor Finance is more rewarding.
4. Shift in Valuations: As interest rates climb, the risk-free rate of return also increases. In turn, this affects how businesses are valued. Investors are likely to demand higher returns to compensate for the increased cost of borrowing, which can result in downward pressure on business valuations. Some sellers may need to adjust their price expectations to remain competitive.
4. Buyer Behaviour: Rising interest rates may prompt buyers to reassess their strategies. Some may be more cautious, taking a step back to reevaluate the acquisition risks and rewards. Business buyers may also consider different financing options or delay purchasing decisions. Sellers must be prepared to adapt to this changing landscape.
5. Opportunities Amid Challenges: While rising interest rates present challenges, they can also create opportunities for astute business sellers. Sellers who can showcase a track record of strong financial performance and the ability to weather economic headwinds will still attract strong buyer demand and in some sectors increased valuations.
The Australian business sales market is transitioning following the sequence of interest rate hikes in 2023. Sellers must be prepared to adapt to deferred payment deal structures, while buyers must assess the changing risk-reward dynamics of acquisitions.
The key to success in this environment is staying well-informed, engaging with financial experts, and remaining agile in market fluctuations. Rising interest rates may present challenges, but they also offer opportunities for those who can navigate the changing tides effectively.