By Paul B. Finch, MBA | 10/31/2026

Interest rates affect private company values through investor return requirements, borrowing costs, acquisition financing, and debt capacity. Although rates may decline from recent highs, business owners and investors should not assume a return to the exceptionally low levels experienced during much of the previous decade.

Understanding today’s interest-rate environment can help owners, investors, lenders, and professional advisers make better-informed decisions regarding transactions, financing, succession planning, and ownership transitions.

Understanding the Neutral Interest Rate

An important reference point is the Neutral Interest Rate, commonly called r-star. It is the theoretical short-term interest rate, typically expressed through the Federal Funds Rate, that neither stimulates nor restricts the economy when inflation is stable and economic activity is near its long-term potential. The Neutral Interest Rate cannot be directly observed and must be estimated through various means.

Recently, the consensus Federal Reserve Bank’s (the “Fed”) official position is that the Neutral Interest Rate should be around 3.2% over the long run, well below the Feds current Federal Funds Rate of 3.75% to 4.0%. That is why many Fed officials had described the Federal Funds Rate as “restrictive,” meaning that the current Federal Funds Rate, above the perceived Neutral Interest Rate, is designed to hold back demand and price pressure in order to achieve the Feds 2.0% target inflation rate. As the PCE Price Index, the Feds preferred measure of inflation, is current running at 3.06% annually, it is reasonable to assume that the current Federal Funds Rate is likely to increase from current levels in the near term.

For valuation purposes, given that the Federal Funds Rate is used as the basis for setting longer-term interest rates, the practical implication is that normalized interest rates, for both short and long term borrowing, may remain above the unusually low levels to which many owners, buyers, and lenders became accustomed to following the 2008 financial crisis.

How Interest Rates Affect Private Company Values:

Higher required returns

A higher risk-free rate, as typically expressed by the 10-Years US Treasury Bond, generally increases the return required by investors. It may also increase a company’s weighted average cost of capital, reducing the present value of anticipated future cash flows.

Utilizing a simplified Capitalization of Earnings Model, consider a business expected to generate $1 million of annual normalized cash flow, with long-term growth of 3%:

At a 13% discount rate, the indicated value is $10.0 million.
At a 14% discount rate, the indicated value is approximately $9.1 million.
At a 15% discount rate, the indicated value is approximately $8.3 million.

In this simplified example, a two-percentage-point increase in the discount rate reduces the indicated value by approximately 17%.

Reduced borrowing capacity

Higher interest rates can also reduce the amount of acquisition debt supported by a company’s cash flow. A buyer may need to contribute more equity, negotiate seller financing, extend the repayment period, or reduce the purchase price to maintain an acceptable debt-service coverage ratio.

This can be especially important in private company transactions where a significant portion of the purchase price is financed through senior debt, subordinated debt, or seller notes.

Greater differentiation among businesses

Higher rates do not affect every company equally. Businesses with the following characteristics are often better positioned to preserve value and obtain favorable financing:

Recurring or contractual revenue
Diversified customers and suppliers
Stable margins and predictable cash flow
A capable management team beyond the owner
Limited key-person dependence
Modest capital-expenditure requirements
Strong working-capital management
Defensible competitive advantages

Companies with volatile earnings, customer concentration, significant owner dependence, excessive leverage, or near-term refinancing requirements may experience greater pressure on value.

When an Independent Valuation May Be Helpful

An independent business valuation can provide owners, investors, lenders, bankers, attorneys, and other advisers with an informed basis for evaluating financial and strategic alternatives.

A valuation may be appropriate when a client is:

Considering the sale or acquisition of a business
Planning an ownership or management transition
Evaluating recapitalization or refinancing
Negotiating a shareholder or partner buyout
Preparing for an estate or gift transaction
Resolving a shareholder, marital, or commercial dispute
Coordinating the values of an operating business and related real estate
Assessing whether projected cash flow can support a proposed transaction
Establishing a baseline for strategic planning and future value growth

For bankers, attorneys, and commercial real estate professionals, recognizing these situations can help clients address valuation issues before they become obstacles to a transaction.

Implications for Owners and Investors

The current interest-rate environment does not necessarily mean that every private company is worth less. It does mean that investors and lenders are more closely examining the durability of earnings, debt capacity, capital requirements, competitive position, and credibility of management forecasts.

Business owners can strengthen value by improving the factors that buyers and lenders can independently evaluate. These include reducing customer concentration, developing recurring revenue, documenting normalized earnings, strengthening the management team, controlling leverage, and preparing supportable financial projections.

Investors should look beyond reported EBITDA and consider cash conversion, working-capital requirements, capital expenditures, financing terms, and the risks associated with achieving projected growth.

Conclusion

Interest rates are only one component of private company valuation, but they influence several important elements of the analysis. These include discount rates, capitalization rates, financing capacity, buyer returns, and transaction structure.

In the current market, business quality matters. Companies with durable cash flow, credible growth prospects, manageable leverage, and transferable competitive advantages are more likely to preserve value and attract favorable financing.

Benchmark Solutions, Inc. assists business owners, investors, lenders, bankers, attorneys, commercial real estate professionals, and other advisers in understanding the factors that drive private company value. An independent valuation can provide a supportable foundation for transaction planning, financing, succession, litigation, and strategic decision-making.

If you would like to learn more about Benchmark Solutions, or request a free consultation, you can locate us online at Work With Us — Benchmark Solutions or visit us on LinkedIn at Benchmark Solutions, Inc.: Overview | LinkedIn

About the Author:

Paul B. Finch, MBA, is a founding Executive Director of Benchmark Solutions, Inc. and a Senior Valuation Analyst/Advisor at the firm. Professionally, Paul is an industry leader in Financial Valuation specializing in business and commercial real estate analysis and valuation, capital structure optimization, the acquisition of financing, and the financial aspects of mergers and acquisitions for business owners, investors, commercial real estate agents/brokers, bankers and forensic engagements.

You can contact Paul at paul.finch@benchmarksolutions.us.com or on LinkedIn at Paul Finch, MBA | LinkedIn

This article is provided for general informational purposes and does not constitute a valuation conclusion, investment advice, or a recommendation concerning specific business or transaction.