How Does the Inflation Rate Affect Business Sales?

The Cost of Inflation

Chalkboard with the word inflation and an underlining arrow written on it to depict rise in inflation rateThe current inflation rate is the highest it’s been in the last 40 years in the United States. I hear about it every day from business owners. Their employees’ wages, fuel, supplies, taxes, and almost every other cost has increased. When it comes time to sell your business, how does this rise in inflation affect the transaction?

Keep in mind that businesses are valued based off profitability. So, if your costs increase and you do not pass along those increases to your customers, your profitability has decreased. A decrease in profitability means a decrease in how much your company will sell for. If you pass your increased costs onto your customers and keep your same profit margin, it will not have a negative effect on what your business will sell for and could possibly be beneficial.

 

Managing the Inflation Rate to Your Benefit

There are several ways that inflation could be beneficial to business owners if properly managed. If you increase the price that you charge, keeping up with inflation, it makes it easier to pay off debt. The dollars you are using to pay the debt off are more available because of inflation. For example, if you borrowed $1 a year ago, that dollar is only worth $0.93 today. If you increased what you charge to your customers to cover the 7 percent inflation, the loan is 7 percent easier to pay back because you have 7 percent more income this year than last year.

The other benefit to inflation is that it will help encourage your competitors to increase pricing because they can no longer stay in business with stagnant pricing. In the long-term, this will make all businesses more profitable as the inflation rate decreases over time.

Inflation is also going to encourage buyers to invest money. If a buyer has money sitting in a bank account, they realize quickly that that money needs to get off the sidelines and get invested into a business – an asset that increases in value with inflation.

 

The Challenges & Solutions

These are a few ways to look at inflation in a positive light. Knowing the effects of inflation and taking advantage properly is key to combating the challenges that come with it. What won’t come with challenges, however, is the expertise with Gateway Mergers and Acquisitions. Our experienced team of knowledgeable industry specialists can guide you through the selling process, a feat we’ve successfully achieved for over 20 years. If you’ve been thinking about transitioning into the next chapter of your life, may it be entering a new industry or even retirement, we’ve got your back. Call us now for a free, no-obligation pricing analysis at (972) 219-6961, or contact us to start the process.

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