The Impact of Inflation and Interest Rates on Business Valuation

Inflation and rising interest rates have drastically impacted business valuations. Higher costs of capital, shifting investor sentiment, and increased economic uncertainty have forced valuation professionals to rethink their assumptions.

This article explores how inflation and interest rates affect valuation methodologies and industry-specific implications.

Key Effects on Valuation

• Higher Discount Rates: Rising interest rates increase the cost of capital, lowering the present value of future cash flows.

  
  

• Profit Margin Pressures: Inflation increases input costs, potentially eroding profit margins.

  
  

• Market Multiple Adjustments: Valuation multiples tend to contract in high-interest environments as investors demand higher returns.

Industry-Specific Impacts

• Real Estate: Higher rates reduce property values and increase financing costs.

  
  

• Technology: Growth companies suffer valuation declines due to increased discount rates.

  
  

• Commodities: Inflation often boosts valuations for resource-based industries.

Inflation and interest rates must be carefully integrated into valuation models to ensure accurate assessments. Arbiter Valuation analysts are experts at quantifying inflation impacts to business valuation.