How do rising interest rates affect a Canadian business owner and their business valuation?
Note: This article reflects the North American interest rate and inflation environment of early 2022, when rates were rising from historic post-2008 lows. The macro figures cited are specific to that period.
When interest rates rise, business valuations come under downward pressure — because most acquirers fund purchases with debt, and higher borrowing costs reduce the price a buyer can pay while still servicing the loan. For owners considering a sale, rising rates create a timing consideration: valuations are typically highest before rate increases fully work through the market.
What was the interest rate and inflation context in early 2022?
In January 2022, Canada's inflation rate reached 5.1% — the highest in 30 years. The United States recorded 7.5% inflation, the highest since June 1982. In response, interest rates were predicted to rise two to three times that year. Rates had been extremely low since 2008, and for the first time since the last recession, increases were beginning. Target increases were approximately 1.25–1.5% in Canada and 1.75% in the United States.
How do rising rates affect acquisition financing and business value?
Acquisition loan financing — used by most acquirers to fund a purchase:
- The cost of acquisition financing increases
- Future cash flow from acquisitions decreases, meaning purchase prices may be pressured down so the business can sustain future debt payments
- Negative pressure is placed on future cash flows, which directly affects business valuation
Operating lines of credit — used by most operators to fund day-to-day operations:
- Operating, inventory, floor plan and other interest expenses increase
- Business earnings before tax are reduced
The net effect: rising rates increase pressure on business valuations and eventually reduce the value of a business, particularly for owners thinking of selling in the next few years.
Why does deal timing matter when rates are rising?
A transaction is typically concluded in 6 to 24 months. Owners who want to close before the end of their next fiscal year should start the process as early as possible. Because valuations are highest before rate increases fully take hold, owners considering a sale benefit from acting while the market is near its peak rather than waiting.
What three steps should a Canadian owner prioritize before selling?
1. Get a valuation — establish exactly where your business stands in today's market
2. Get operations and accounting in order — business value is determined from past, present and future financial performance, so having your financial affairs in order is essential; this effort is never wasted and builds a solid foundation
3. Consider legal implications and potential tax liabilities — study your liabilities and the necessary accounting aspects
Most business operators should not manage all of this alone. Consulting experienced legal, accounting, tax and M&A advisors ensures all bases are covered, given the many moving pieces in any transaction.
Key facts: rising interest rates and Canadian business valuations (early 2022 context)
Canada inflation (January 2022): 5.1% — highest in 30 years
U.S. inflation (January 2022): 7.5% — highest since June 1982
Projected 2022 rate increases: ~1.25–1.5% (Canada), ~1.75% (U.S.)
Core effect: higher borrowing costs reduce acquisition cash flow and pressure purchase prices down
Transaction timeline: typically 6–24 months from start to close
Three priorities before selling: get a valuation, put operations/accounting in order, address legal and tax liabilities
Disclaimer: This article reflects market conditions as of early 2022 and is provided for general informational purposes only. It does not constitute legal, tax or financial advice. Interest rate and inflation conditions have since changed materially; consult qualified advisors regarding current circumstances.
