Inflation and Business Sales
Insights by Peter Watson.
As a child of the 70s I can remember when inflation was 15%, even though I was not directly impacted by it. Back then a spike in oil prices was a key factor (due to geopolitical forces in the Middle East).
Recent inflation is at least in part due to the marked hike in gas prices and also a result of geopolitics.
After years of quantitative easing, the central banks are now having to look at raising interest rates to limit demand. Hopefully this time inflation can be overcome more quickly with a tightening of monetary policy – but what impact does inflation have on business sales?
Acquirers have been sitting on cash sums for some while, earning negligible interest. To have the buying power of this money further reduced by inflation actually creates even more imperative to invest in inflation-proof assets – eg. companies – as evidenced by the booming private equity market. Even with interest rates rising we do not see demand for acquisitions falling in the short-term.
Another key impact is on the proceeds from a business sale. Whilst it’s a nice problem to have, leaving large amounts of money too long in cash is probably not a great idea. Deferred and contingent income can also be affected by inflation, particularly where values are fixed at completion. We are now looking to introduce interest payments on outstanding amounts in structured deals to compensate.
Whilst I am hopeful that we are better placed to manage inflationary pressures than we were in the 70s, history does have a habit of repeating itself!
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