[a cu men]
n. keenness and depth of perception, discernment or discrimination, especially in practical matters.
INTEREST RATES: How They Affect A Sale
Until recently, interest rates have been at historically low levels . While rates still remain comparatively low, they have been increasing.
Interest rates are not only a significant market factor in the overall economy, they also have direct influence when it comes to valuing – and selling – your funeral home or cemetery business. And the impact can be greater than you may think.
LOWER RATES GENERALLY = BETTER VALUES
Any Buyer evaluating a business will examine the cash that business generates in the context of the cost of capital. As a general rule and with all other factors being equal, as the cost of money increases, the relative value of the business will decrease.
Simply stated: the higher the cost of money, the higher the cot of acquiring.
PARALLEL EXAMPLE
A good parallel example is that of buying or selling a home. When interest rates go up, home buyers can actually afford less house, since more of their monthly payment will be allocated to interest. Lower interest rates equate to cheaper money - a catalyst for buying - whether it’s buying a home or business.
BUYER'S MARKET vs. SELLER'S MARKET
Interest rates can also affect activity within the market. In the housing market, lower interest rates often generate more home purchases - and sales - because the home-buying dollar goes further when less of each dollar is allocated to the cost of money, i.e. interest. This leads to increased activity within the market which often makes it easier to not only sell your home, but also to obtain a good selling price - a seller's market.
Conversely, when interest rates increase and more of the home-buying dollar is allocated to interest, activity in the market may slow down as the cost of money goes up and the qualified buyer pool diminishes. This, in turn, may make it a little more challenging to sell when you want to and at your target price - factors commonly associated with a buyer's market.
WHAT WILL RATES DO?
While no one can know for sure how and when interest rates may change, one thing is certain: the interest rate environment following the market corrections of 2008 resulted in historically low levels. Some contend these rates were as low as we may see in a lifetime; indeed, when the fed funds rate dipped as low 0.25%, it’s plausible to ponder if that would – or could – happen again. As of early 2019, the fed funds rate is 2.5% (10x higher than the 2009 low).
As various sectors of the economy have shown signs of strengthening in recent months, the Federal Reserve has responded by increasing lending rates to counter the expected effects of inflation. Further rate increases remain to be seen.
SO WHEN IS THE BEST TIME TO SELL?
From a purely personal perspective, only the seller can know when the time is right for them to sell. For some, a critical health issue may be the determining factor; for others, it may be family circumstances, reaching retirement age or the death of an owner.
Personal factors notwithstanding, however, and from a purely economic perspective, it's important to recognize that higher interest rates tend to increase the cost of acquisition for a buyer, which, in turn, tends to result in lower purchase offers.
Recent changes in interest rates suggest that close observation of this market factor is merited, regardless of your timeline.
NOTE: SCI and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
We’re focusing on “acumen” in a series of brief, informative topic summaries. Acumen, as defined by Merriam-Webster, refers to “keenness and depth of perception, discernment or discrimination, especially in practical matters.” Each summary is a brief introductory overview of a topic; new topics will be added periodically. As you read through the summaries, put your list of questions together. Then give us a call. There’s no cost or obligation to visit with us – and every conversation and communication is kept completely confidential. Our team is always available to serve as a reliable resource for questions about transition.
Interest rates are not only a significant market factor in the overall economy, they also have direct influence when it comes to valuing – and selling – your funeral home or cemetery business. And the impact can be greater than you may think.
LOWER RATES GENERALLY = BETTER VALUES
Any Buyer evaluating a business will examine the cash that business generates in the context of the cost of capital. As a general rule and with all other factors being equal, as the cost of money increases, the relative value of the business will decrease.
Simply stated: the higher the cost of money, the higher the cot of acquiring.
PARALLEL EXAMPLE
A good parallel example is that of buying or selling a home. When interest rates go up, home buyers can actually afford less house, since more of their monthly payment will be allocated to interest. Lower interest rates equate to cheaper money - a catalyst for buying - whether it’s buying a home or business.
BUYER'S MARKET vs. SELLER'S MARKET
Interest rates can also affect activity within the market. In the housing market, lower interest rates often generate more home purchases - and sales - because the home-buying dollar goes further when less of each dollar is allocated to the cost of money, i.e. interest. This leads to increased activity within the market which often makes it easier to not only sell your home, but also to obtain a good selling price - a seller's market.
Conversely, when interest rates increase and more of the home-buying dollar is allocated to interest, activity in the market may slow down as the cost of money goes up and the qualified buyer pool diminishes. This, in turn, may make it a little more challenging to sell when you want to and at your target price - factors commonly associated with a buyer's market.
WHAT WILL RATES DO?
While no one can know for sure how and when interest rates may change, one thing is certain: the interest rate environment following the market corrections of 2008 resulted in historically low levels. Some contend these rates were as low as we may see in a lifetime; indeed, when the fed funds rate dipped as low 0.25%, it’s plausible to ponder if that would – or could – happen again. As of early 2019, the fed funds rate is 2.5% (10x higher than the 2009 low).
As various sectors of the economy have shown signs of strengthening in recent months, the Federal Reserve has responded by increasing lending rates to counter the expected effects of inflation. Further rate increases remain to be seen.
SO WHEN IS THE BEST TIME TO SELL?
From a purely personal perspective, only the seller can know when the time is right for them to sell. For some, a critical health issue may be the determining factor; for others, it may be family circumstances, reaching retirement age or the death of an owner.
Personal factors notwithstanding, however, and from a purely economic perspective, it's important to recognize that higher interest rates tend to increase the cost of acquisition for a buyer, which, in turn, tends to result in lower purchase offers.
Recent changes in interest rates suggest that close observation of this market factor is merited, regardless of your timeline.
NOTE: SCI and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
We’re focusing on “acumen” in a series of brief, informative topic summaries. Acumen, as defined by Merriam-Webster, refers to “keenness and depth of perception, discernment or discrimination, especially in practical matters.” Each summary is a brief introductory overview of a topic; new topics will be added periodically. As you read through the summaries, put your list of questions together. Then give us a call. There’s no cost or obligation to visit with us – and every conversation and communication is kept completely confidential. Our team is always available to serve as a reliable resource for questions about transition.
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