If you’re going to sell, hurry up and do it, because interest rates are hurting your prospects. ANDREW KENT
By Andrew Kent
As the Reserve Bank fights inflation with the only weapon available to it – interest rates – it acknowledges that one of the groups most affected are privately owned businesses.
As the people with safe jobs in Canberra have said: “Small and privately owned businesses are more exposed to debt finance as they have a limited ability to raise finances through other means.”
It would appear that this exposure to debt is regarded as a good thing by the Treasury Department in its fight against inflation as it will ensure that small and medium enterprises will feel the pain of interest rate rises and reduce their expenditure, and subsequently easing the demand side of the economy.
What they have perhaps failed to take into account is that this sector of the economy has a very different profile than the last time a government tried to put the squeeze on the economy. The vast majority of small and medium businesses are service providers, with wages their dominant expense.
It could be that the Government’s conviction to turn back the WorkChoices legislation combined with SMEs looking to reduce costs will result in fairly swift reduction in employment.
Last time there was a wave of retrenchments across Australia it was a boon for franchisors and the small business sellers, as retrenched workers used their redundancy pay to finance the purchase of their own business. Unfortunately this time around even this may not provide a silver lining, as SME employees rarely depart with very much cash in their pockets.
All of which leaves the business market in a tight spot. Increases in interest rates hit business sellers twice – first they reduce their business margins, which affects the earnings and therefore the price. Second the increase to the cost for the purchaser, reducing the amount they are prepared to pay.
So it is a good idea to either sell before these factors bite, or wait for them to pass – whenever that is. For those contemplating retirement in the next few years, now may be as good as it gets.
Andrew Kent is a director of BizExchange, an independent marketplace for business for sale or seeking investment. BizExchange has a directory of independent advisers and business brokers and information on valuations
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