RSM Australia

Are low interest rates reducing business risk?

The current low-interest climate

In 2016, the Reserve Bank has again lowered the cash rate, taking a 0.25% cut to bring the rate down to the current 1.5%.  It really is staggering – an official cash rate of just 1.5%.  Recently one bank has come out and boldly predicted the rate will fall to 1.0%.

We did a little research and have found that this rate has been declining ever since October 2011 when it was – wait for it – 4.75%. And then that rate was a ‘peak’, having risen from 3% in Sept 2009. The last time the cash rate was in double digits – September 1991. That is 15 years ago.

Should you pay more? 

With the cost of funds heading south, how does this impact one’s view of buying a business?  Should you pay more for the business because the cost of money is cheaper?

The answer to that question is a fundamental ‘No!’  Irrespective of how much you are borrowing to fund the acquisition, any business has an inherent commercial value.  Your focus should be on what profit is generated by the business and what is the price paid. This derives the return on investment (Profit generated / Price paid).  The profit measure is taken before interest, confirming the separation from debt in order to determine the value. (This profit measure is known as EBITDA).

Read more in the link below and find out the 10 steps to taking control.

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