How Interest Rates Are Impacting Deal Valuations

Interest rates are at their highest in over a decade, and dealmakers across the industry are revaluating how they assess risk, value assets, and structure deals. The effects for both buyers and sellers has made deals more complicated and has lead both parties to adapt to a shifting valuation landscape.

Why Interest Rates Matter in M&A

• Cost of Capital: Debt financing has become more expensive
• DCG Models: Higher discount rates have reduced company valuations
• Buyer Risk: Caution rises in tight credit conditions.

Industry-Specific Impact

• Manufacturing/Energy - Heavily impacted due to capital-intensive, debt-reliant deals.
• SaaS/Tech - Growth-stage valuations compressed due to lower future cash flow value.
• Healthcare/Logistics - Still attractive, but face more buyer scrutiny.

Buyer Behavior Shifts

• More focus on profitability & cash flow, not just growth
• More creative structures: earnouts, seller financing, equity rollovers
• Longer deal timelines due to cautious due diligence 

What Sellers Should Know

• Valuation expectations need to adjust: 2021 multiples are gone.
• Strong financials are now essential: clean books, recurring revenue, low churn.
• Timing strategy: Some may delay sale, others may act before rates rise more.

Outlook/Forecast

• If rates drop, deal activity and multiples could rebound.
• PE firms still have capital but are being highly selective.
• Fundamentals matter more than hype - quality targets still get deals done.

Why Interest Rates Impact M&A Valuations

• Higher interest rates = higher cost of debt financing (Fewer leveraged buyouts)
• Buyers' hurdle rates increase that requires higher ROI to justify the same price.  
• Valuations models adjust:
• In DCF models, the discount rate (WACC) increases = lower present value.
• In comparable company analysis, multiples are compressing due to broader market shifts.
• Financing availability declines = Banks tighten credit; this leads to fewer "stretch" deals.

How Buyers have been Adapting

• Shift to cash-heavy deals or creative financing.
• Greater due diligence focus: buyer wants deeper insight into cash flow stability.
• More conservative revenue forecasts in valuation models.
• Repricing mid-deal is more common, especially if financing terms change.

If you’d like a confidential discussion about how current rates and buyer behavior could affect your company’s value, contact us for a confidential conversation.