The Impact of Interest Rates on Your Firm’s Valuation
How much your firm is worth is affected by how much you can outperform the returns of the alternatives.
The higher the interest rate, the bigger return you must offer investors. Why?
- Risk free US treasuries will produce a ~5% return.
- Secured bank loan will produce a ~10% return.
- Private investment in a mature company will produce a ~20% return.
- Private investment in a small boutique professional service firm needs to produce a ~40% return.
Therefore, the higher the interest rate, the less attractive your firm is, relative to other less risky investments.
Hurdle rate of ~40% for owners of boutique professional service firms.
- Note: shout out to the great Geoffrey Moore and The Gorilla Game for this chart.