M & A and Navigating Interest Rates – 4 Strategic Actions for Private Business Owners

Interest rates play a critical role in shaping the mergers and acquisitions (M&A) landscape, influencing business valuations, transaction structures, and market liquidity. While a declining interest rate environment typically facilitates leveraged acquisitions, an extended period of elevated borrowing costs presents distinct challenges. For private business owners seeking liquidity events, recapitalization, or strategic exits, navigating high interest rates effectively requires disciplined financial management, astute operational execution, and innovative deal structuring.

Market Dynamics: The Implications of Prolonged HighInterest Rates

Should the Federal Reserve maintain its current rate policy in 2025, transaction financing will remain constrained, leading to a recalibration of enterprise values and M&A activity. The higher cost of debt will necessitate a greater reliance on equity capital, increasing buyer selectivity and intensifying scrutiny of financial and o

Key Market Considerations

• Valuation Compression: In prior low-interest periods, enterprise value-to-EBITDA multiples averaged 7.8x; under sustained high rates, they have adjusted     downward to approximately 5.9x. Without rate relief, businesses must generate stronger cash flows to sustain competitive valuations.
• Constrained Buyer Liquidity: Private equity firms, strategic acquirers, and family offices face higher debt financing costs, prompting a shift toward cash-flow-positive acquisitions and structured transactions.
• Selective Buyer Engagement: Investors will increasingly prioritize well-capitalized businesses with demonstrable revenue durability, operating efficiencies, and scalable business models.

Strategic Actions for Private Business Owners

To achieve optimal M&A outcomes in a high-interest rate environment, business owners must proactively fortify financial positions, enhance EBITDA performance, and structure transactions that mitigate financing constraints.

‍1. Drive EBITDA Growth Through Operational Enhancements

Since valuation multiples remain compressed, EBITDA expansion is the most effective means of preserving transaction value.

Example: Roofing Business Valuation Optimization‍

• 2024: Revenue of $23 million; EBITDA of $3 million; valuation at a 5.0x multiple = $15 million.
• 2026 (projected): EBITDA improvement to $3.6 million; adjusted multiple at 5.9x = $21.2 million.

Recommended Actions:

• Implement process automation to lower fixed costs and improve profit margins.
• Expand high-margin service offerings, such as solar installations and commercial roofing.
• Optimize working capital through enhanced receivables management and cash flow discipline.

‍2. Strengthen Financial Position to Attract Investors

Buyers remain highly sensitive to balance sheet strength in a high-rate market. Businesses with strong liquidity and prudent debt management will command superior valuations.

Example: Marine Logistics Enterprise Restructuring

• 2024: Revenue of $34 million; EBITDA of $4 million; debt burden of $10 million; valuation at 5.0x EBITDA = $20 million
• 2026: Debt reduction to $8 million; improved liquidity reserves; valuation increases to 5.9x EBITDA = $23.6 million

Recommended Actions

• Refinance existing debt to reduce interest expenses and improve cash flow.
• Divest non-performing assets to strengthen financial flexibility.
• Maintain debt-to-EBITDA ratios below 2.0x to enhance investment attractiveness.

‍3. Implement Structuring Mechanisms to Optimize Transactions

Creative structuring can mitigate the adverse effects of higher borrowing costs while ensuring competitive deal terms.

Example: Domestic Manufacturing Business Transaction Structuring

• 2024: Revenue of $59 million; EBITDA of $8 million; valuation at 6.5x EBITDA = $52 million.
• 2026: Higher-cost debt restricts leverage; transaction structured as $40 million upfront, $7 million earn-out contingent on EBITDA growth, $5 million equity rollover.

Recommended Actions:

• Incorporate seller financing to provide transaction flexibility.
• Establish earn-out agreements linked to performance milestones, ensuring alignment between seller and buyer interests.
• Optimize equity rollover structures to preserve upside potential while de-risking the transaction.

‍4. Identify and Engage Growth-Oriented Buyers

Market conditions necessitate aligning with acquirers actively seeking industry expansion and operational synergies.

Example: Roofing Business Acquisition by a Strategic Buyer

• 2026: EBITDA increases to $3.6 million; valuation rises to 6.5x multiple = $23.4 million, outperforming private equity bids.

Key Buyer Attraction Drivers:

• Sector consolidation opportunities in adjacent industries (HVAC, fencing, siding).
• High-growth segments such as solar roofing, with annual demand expansion exceeding 12 percent.
• Demonstrated ability to integrate and scale operations effectively.

‍Securing Competitive M&A Outcomes in a High-Rate Environment

Absent Federal Reserve rate reductions, market consolidation will favor sellers who have strategically positioned themselves for premium valuations. Business owners must optimize earnings, fortify financials, structure transactions effectively, and engage acquirers with expansion-driven investment theses to ensure robust M&A outcomes.

Priority Next Steps for Private Business Owners

• Enhance EBITDA through cost controls, efficiency measures, and high-margin revenue expansion.
• Strengthening financials by reducing leverage, building liquidity reserves, and maintaining disciplined fiscal management.
• Engage experienced M&A advisors to access premium buyers and facilitate optimal deal structuring.

To achieve favorable outcomes in an environment of sustained high interest rates, business owners must take a proactive stance in refining financial and operational strategies. Strengthening profitability, maintaining a resilient balance sheet, and crafting adaptable transaction structures will be key to overcoming valuation pressures and securing premium exit opportunities. By implementing strategic measures that enhance business fundamentals, sellers can position themselves competitively, attract well-capitalized acquirers, and maximize transaction value despite broader market challenges.

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‍If any of this resonates with you, we encourage you to complete our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.

Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle and middle market business owners from coast to coast through representation for Mergers & Acquisitions Matt Gilbert and Bret Pardue established GaP to provide owners of privately-held businesses – those businesses generally enjoying annual revenue of $10-$100 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.

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