Shareholder and Corporate Practice Group Leader Terry Thompson shares his insights with the Phoenix Business Journal on how high interest rates, which have slowed home sales nationwide, similarly influence mergers and acquisitions (M&A). Terry also discusses the anticipated wave of baby boomers selling their businesses, exploring where we are in this cycle, and whether the current high interest rate environment has affected or delayed their decisions to exit.
Authored by Dale Brown, Research Director at the Phoenix Business Journal | August 2024
The high interest rates that have slowed home sales across the country also have an effect on merger and acquisition (M&A) transactions, according to some Valley M&A attorneys — but there are still plenty of ways to consummate a deal in this environment, even as the Fed has finally confirmed that a rate cut is coming in September.
In compiling the Business Journal's Law Practices – Mergers & Acquisitions list that was published Aug. 23, we tossed out a few questions for the folks running the practices.
High interest rates and the current economy have made it tougher to buy a house. How about buying a company? Any difference from five years ago?
"The higher interest rates have chilled M&A activity in that private equity firms that rely on borrowing to complete transactions have instead not been as competitive in bidding on deals, causing all buyers to bid lower prices, and causing owners to kick the can on selling their companies until they receive higher valuations. That said, we have been very busy doing non-PE-funded acquisitions between buyers and sellers at what I consider to be 'non-frenzied pricing.'" – Scott Weiss, attorney, Weiss Brown
"Yes, it's harder today given high interest rates and inflation. However, Americans continue to be resilient in finding a way/ways to make an intended sale work. We see a lot of seller carrybacks and less reliance upon traditional lenders." – Janet Jackim, partner, Zuber Lawler
The environment of extremely low interest rates five years ago made the decision to take on debt to fund an acquisition quite easy. Of course, interest rates rose rapidly and materially after that. The [events of recent months] dashed the hopes of many at the end of last year that interest rates would rapidly decline this year. For some who needed to borrow to buy a company, that delay in cutting interest rates has deterred the buying. In addition, many businesses are struggling to break even, and those companies are not in a position to buy others, regardless of the level of interest rates.
On the other hand, for those eager to buy and believing that at some point interest rates will decline, that belief has been enough to lead them to resume buying activity: They calculate that, among other things, they will be able soon enough to refinance at a much lower interest rate. For that reason, there has been increasing interest in initiating discussions about acquisitions.
Terence W. Thompson, Shareholder
A few years ago we heard there was a rush of baby boomers looking to sell off their businesses. Where are we at in this cycle, and did the interest rate environment affect or delay those decisions to take an exit strategy?
"We don't see this rush yet, likely because: (a) baby boomers' children are not quick to step up in assuming responsibility for the businesses; and (b) these children and their grandchildren still believe they can live off of the efforts of their boomer predecessors." – Jackim
For business owners of the baby boom generation, there has not been so much a rush as rather a natural trend over the past dozen years [and continuing] toward selling the business. In many cases, if not most cases, neither the next generation nor the employees want to or are able to take over the business. On the other hand, many in the baby-boom generation do not necessarily feel an urgent need to step away from the business. They see many prominent older owners who continue to own and run their businesses and seem to be quite happy doing so.
To the extent that they would like to sell, the ability to sell can be indirectly and adversely impacted by high interest rates: Since many buyers need to, or would prefer to, borrow in order to purchase a business, the universe of potential buyers tends to go down as interest rates go up.
Terence W. Thoompson, Shareholder
Click here to read the full article published by the Phoenix Business Journal.
About Terry Thompson
Terry Thompson leads the firm's Corporate Practice Group and handles business mergers, acquisitions, financings, and public-private projects, including strategic joint ventures, water/wastewater infrastructure development, sports facility financing, and physician-hospital contracts.
Having chaired the multi-year State Bar committee project that oversaw the revision of Arizona’s corporate statutes, including the business corporation code, the professional corporation code, and the nonprofit corporation code, and participated in a similar project to revise Arizona’s limited liability company statutes, Terry also advises businesses and other organizations as to various aspects of governance and operation.