What Falling Interest Rates Mean for Seller Valuations and Timing

For business owners, timing a sale is one of the most critical — and most difficult — decisions. Wait too long, and you risk missing a window. Move too early, and you might leave value on the table. 

The Federal Reserve’s recent decision to cut rates — and its signaling of more cuts ahead — just changed that timing game.

How Interest Rates Flow Through to Valuations

When the Fed cuts rates, it ripples through the system — lowering the cost of capital across the board.

• Fed to Banks: The Federal Reserve pays interest on reserves to commercial banks, which in turn shapes the lending benchmarks that businesses borrow against.
  
• Banks to Buyers: Cheaper bank lending means cheaper acquisition financing. High rates, on the other hand, force buyers to use less debt to finance acquisitions, reducing what they can afford to pay.
  
• Valuation Effect: Higher borrowing costs compress valuations. Lower borrowing costs expand them.
  
• Why It Works: When borrowing is cheaper, buyers can still hit their return goals while paying more — the savings on interest leave room for a higher purchase price.

A one-point shift in interest rates can add millions to the annual financing costs of a mid-market deal. That ripple directly affects what buyers can pay — and what owners ultimately receive at the closing table.

Median Valuation Multiples for $1M – $5M EBITDA Businesses

Source: Axial Platform Data

The chart above illustrates the same dynamic for larger businesses with $1M–$5M EBITDA. In 2022, when rates were still low, buyers could stretch to pay 6–7× earnings because cheap debt meant deals penciled out even at higher entry prices. As rates climbed through 2023, financing costs ballooned, forcing buyers to cut leverage and driving multiples down sharply — bottoming out around 4×. Starting in late 2024, as the Fed began easing policy, valuations recovered. Cheaper debt gave buyers more room to pay, and lower yields on safe assets nudged more investors toward private deals, lifting multiples back above 6× by mid-2025.

Healthcare Services Valuation Case Study

Source: Axial Platform Data

This case study highlights just how dramatic the impact of interest rates can be on deal outcomes. In Q3 2022, with borrowing costs still near historic lows, a healthcare staffing business with $1.4M in EBITDA sold for over $12M — an 8.4× multiple. Fast forward to Q2 2025: a nearly identical business with slightly higher revenue and the same EBITDA sold for less than half that amount, at a 4.0× multiple. 

The businesses were comparable, but the financing environment was not. With debt far more expensive in 2025, buyers could not justify the same leverage or valuation. For business owners, the takeaway is clear: the same company can command vastly different outcomes depending not just on its performance, but on the broader interest rate backdrop.

Financing Conditions Are Tilting in Your Favor

When debt is expensive, buyers pull back and valuations soften. When debt becomes cheaper, lenders open up, and buyers underwrite more aggressive purchase prices.

Private equity firms, independent sponsors, and strategic acquirers all benefit from this environment. Even SBA buyers — who lean heavily on prime-rate lending — feel the effect immediately. Every quarter-point cut by the Fed lowers its cost of capital, giving them more room to stretch.

It’s not unusual to see a 25–75 basis point drop in rates translate into half a turn of EBITDA multiple expansion. For an owner, that can mean the difference between a “solid” exit and a “life-changing” one.

Dry Powder and Pent-Up Demand

Private equity firms are sitting on record levels of dry powder. Strategic buyers — especially public companies — are under pressure to deliver growth amid slowing organic expansion.

For the past two years, many of those buyers waited out high borrowing costs. A Fed pivot is the green light they’ve been looking for. As capital loosens, buyers move quickly to put it to work.

On the other side, many owners delayed their own decisions in 2023–2024. That supply will hit the market in 2026 and 2027. Owners who prepare now will be positioned ahead of the crowd — and in M&A, being early often means stronger leverage and cleaner processes.

Valuation Floors Are Rising Again

Every M&A cycle has “valuation floors” — the baseline multiples that businesses of a given size and profile tend to command. High-rate environments push those floors down.

Rate cuts lift them. For a $5–10M EBITDA business, where multiples had drifted into the mid-4x to mid-5x range, signs are pointing back toward the high 5s and 6s. Strong businesses with recurring revenue, diversified customers, or growth tailwinds are positioned even better.

But these floors don’t stay elevated forever. Once supply floods in, buyers have more choices. Timing your exit to land in this financing-friendly, demand-heavy moment is what captures the premium.

Lessons From the Last Two Cycles

These shifts aren’t just theory — we’ve seen them play out before:

• 2013–2014: After the Fed kept rates at historic lows, middle-market deal activity surged. One owner who went to market in 2013 sold at 6x EBITDA. A peer with a nearly identical business who waited until 2016 exited at 5x, as supply spiked and credit tightened. Same fundamentals, 20% different outcome.
  
• 2020–2021: When the Fed slashed rates in response to COVID, valuations for quality lower middle market companies skyrocketed. Multiples expanded, competition was fierce, and sellers who ran processes in 2021 achieved premium outcomes. By mid-2022, after rapid hikes, that window had slammed shut.
  

The pattern is clear: rate cuts + buyer demand + limited supply = strong valuations. Waiting until the window is obvious usually means competing with everyone else.

The Strategic Value of a Long Runway

Hiring an advisor in Q4 2025 sets up an ideal timeline:

• Q4 2025: Preparation — financial cleanup, positioning, go-to-market materials.
  
• Q1–Q2 2026: Formal buyer outreach and management meetings.
  
• Q4 2026: Closing, assuming a typical 6–9 month process.
  

This timeline aligns with the Fed’s projected easing cycle and a buyer universe eager to re-engage. Just as importantly, it gives your advisor time to run a disciplined process — positioning your company to attract multiple bidders, not just one or two.

The Devil’s Advocate: Why Now May Not Be Perfect

Not every owner will find “right now” to be the best timing:

• More Cuts Could Be Ahead: If the Fed continues easing through 2026, debt could get even cheaper.
  
• Business Readiness: Weak margins, customer concentration, or messy books won’t be fixed by rate cuts. Taking time to shore up fundamentals can sometimes pay off more than rushing.
  
• Macro Volatility: Elections, geopolitics, or a slowdown could mute buyer enthusiasm.
  
• Timing the Crowd: Some try to wait until valuations clearly peak. Occasionally, it works. More often, it means entering just as the market saturates.
  

Rate cuts create a powerful tailwind, but they don’t replace the need for strong fundamentals and readiness.

Why Acting Early Matters

The instinct for many owners is to wait — for valuations to rise a little more, for the market to feel “hot.” But by the time it’s obvious, the crowd is already rushing in.

The best outcomes come to those who anticipate, not those who react. Acting early doesn’t just maximize financial leverage; it also builds emotional confidence. Owners who start preparing now won’t just have better negotiating leverage; they’ll also have peace of mind that they didn’t leave timing to chance.

The Takeaway

Selling a business is never just about macro conditions. The fundamentals of your company matter most. But when the external environment tilts in your favor, it creates a tailwind worth riding.

The window is opening. Owners who prepare now — hiring an advisor in Q4 2025, preparing through early 2026, and going to market in the back half of the year — will be positioned to step through it before the crowd.