Press release
Interest rates add weight to sinking feeling
As the Reserve Banks fights inflation with the only weapon available to it, i.e. interest rates, it acknowledges that one of the groups most affected are privately owned businesses. As stated by people with safe jobs in Canberra - "Small and privately owned businesses are more exposed to debt finance as they have a limited ability to raise finances through other means". It would appear that this exposure to debt is regarded as a good thing by the Treasury Department in it's fight against inflation as it will ensure that small and medium enterprises will feel the pain of interest rate rises and reduce their expenditure, subsequently easing the demand side of the economy.
What it has perhaps failed to take into account is that this sector of the economy has a very different profile than the last time a government tried to put the squeeze on the economy. The vast majority of small and medium businesses are service providers with wages as their dominant expense. It could be that the Government's conviction to turn back the Work Choices legislation combined with SME's looking to reduce costs will result in a fairly swift reduction in employment.
Last time there was a wave of retrenchments across Australia it was a boon for franchisors and small business sellers as retrenched workers used their redundancy pay to finance the purchase of their own business. Unfortunately this time around even this may not provide a silver lining as SME employees rarely depart with very much cash in their pockets.
All of which leaves the business market in a tight spot. An increase in interest rates hits business sellers twice: first it reduces their business margins, which impacts on the earnings and therefore the price. Second it increases the cost for the purchaser, reducing the amount they are prepared to pay. So it is a good idea to either sell before these factors bite, or wait for them to pass - whenever that is. For those contemplating retirement in the next few years, now may be as good as it gets.
Text by BizExhange - Market Watch - Interest rates weigh into market
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