Here’s an overview of how inflation is impacting the market.
Even though our industry is a recession-resistant business, that doesn’t mean it’s recession-proof. Given the state of inflation and rising interest rates, many want to know what’s happening to valuations in our current environment.
Valuations in companies that profit $5 million and under are starting to shrink because the borrower’s cost of money has increased. The numbers that made sense to homebuyers and their lenders around a year ago don’t make sense anymore. In the last 90 days alone, valuations have decreased by half a multiple. That means if someone said they would pay you $3 for every dollar of profit you turned a year ago, they would now pay $2.50 for each dollar.
Companies that profit $1 million or above have been unaffected so far. However, the data suggests that by the beginning of 2023, some of the bigger companies will experience valuations that are compressed as private equity, and many national players will see the cost of capital increase.
If you’re thinking of selling within the next year or two, I highly recommend that you do it sooner than later. Our projections for the coming months aren’t very positive, and we anticipate at least another interest rate hike from the Federal Reserve, which will also compress margins.
If you have any questions about what’s going on in the market or need assistance, give me a call or send me an email. I’d love to help you.
