Guest Post: The Latest Impact of Inflation on Businesses & M&A Industry

Team Acquira
-  June 30, 2023
effects of inflation on business

Global economic uncertainties and inflation have significantly impacted the mergers and acquisitions (M&A) market in recent years.

Business owners looking to sell their businesses must now grapple with the realities of lower valuations and more cautious buyers.

In this article, we will explore the effects of inflation on business valuation, strategies to mitigate its impact, and how working with a professional M&A advisor like IAG M&A Advisors can help you navigate this challenging landscape.

Connection Between Inflation and Business Valuation

Inflation, or the general increase in prices over time, can profoundly affect a company’s value. Business valuation is critical to selling a business, as it determines the price a buyer is willing to pay for the company. Inflation can negatively impact business value by eroding purchasing power, increasing costs, and creating uncertainties in the market.

1. The Effects of Uncertainty on Business Valuation

Uncertainty in the global economy, such as recessions, geopolitical tensions, and political polarization, can lead to lower valuations in the M&A market. Buyers and investors become more cautious and risk-averse when faced with economic and political uncertainties. As a result, they may offer lower multiples of earnings before interest, taxes, depreciation, and amortization (EBITDA) or revenue when valuing businesses.

2. The Role of Inflation in Reducing Valuations

Higher inflation rates can directly impact business value by increasing the costs of goods and services, leading to reduced profit margins. Additionally, inflation can cause interest rates to rise, making it more expensive for businesses to borrow money and finance growth. This can result in lower valuations, as investors may require a higher rate of return to compensate for the increased risks associated with inflation.

The Current State of the M&A Market Amid Inflation

how does inflation affect companies

Despite the challenges posed by inflation and uncertainties, deals are still being completed in the M&A market. However, these transactions often involve lower valuations and more stringent terms than in previous years.

1. The Shift in Valuations and Deal Terms

Businesses in various sectors, from high-tech companies to manufacturing, distribution, and service firms, face lower valuation multiples. For example, a tech company that might have traded at 10-15 times revenue in the past may now be valued at only 8-10 times revenue. Additionally, deals may include deferred payment structures, such as earnouts or seller financing, which can further reduce the upfront payment a seller receives when selling their business.

2. The Importance of Strong Business Fundamentals

Despite lower valuations, businesses with strong fundamentals can still attract interest from buyers. Some key characteristics that contribute to a company’s value include consistent growth rates in revenue and margins, a solid management team, a robust organizational structure, a strong brand reputation, and a competitive market position. By focusing on these fundamentals, business owners can help ensure their companies remain attractive to potential buyers.

Strategies to Protect Business Value from Inflation

While inflation can negatively impact business value, there are several strategies that business owners can adopt to mitigate its effects. By implementing these strategies, businesses can better position themselves for success in the M&A market, even amid inflationary pressures.

1. Enhance Pricing Power

To protect profit margins from inflation, businesses should strive to increase their pricing power. This can be achieved by offering non-discretionary products or services that customers cannot easily substitute or delay purchasing. Companies with more significant market share and less competition typically have more pricing power, enabling them to pass on cost increases to their customers effectively.

2. Improve Cost Structure

Businesses should also focus on improving their cost structure to reduce the impact of inflation on their bottom line. This can involve negotiating better pricing with suppliers, investing in cost-saving technologies, or streamlining production processes to increase efficiency.

3. Optimize Growth and Investment Efficiency

Companies should aim to become more efficient in their investments and growth strategies. By focusing on short-term, flexible investments and avoiding long-term, rigid commitments, businesses can better adapt to inflationary pressures and protect their value.

4. Manage Risk

Managing Risk is essential in the face of inflation. Businesses should consider refinancing high-interest debt, diversifying their revenue streams, and operating in stable markets to reduce their exposure to inflation-related risks.

How IAG M&A Advisors Can Help

Navigating the complexities of the M&A market amid inflation can be challenging for business owners. By partnering with a professional M&A advisor like IAG M&A Advisors, you can receive expert guidance on how to sell your business and achieve the best possible outcome.

IAG M&A Advisors can provide an accurate business valuation, considering the impact of inflation on your company’s value. They can also help you implement strategies to protect your business value and prepare your company for sale in this uncertain economic environment.

In conclusion, while inflation and economic uncertainties have undoubtedly impacted business valuations and the M&A market, deals are still being completed. By focusing on strong business fundamentals, implementing strategies to mitigate the effects of inflation, and working with a professional M&A advisor like IAG M&A Advisors, business owners can successfully navigate the challenges of selling their businesses in this economy.

Guest post provided by IAG, a preferred broker partner of Acquira.

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