Here we are already into February and one trend for the new year that we have seen is that interest rates have gone up considerably. It was not uncommon to see rates for the majority of last year (2017) in the high 3’s to low 4’s. Fast forward a few months into 2018 and rates are being seen in the mid 4’s to low 5’s now. This is not favorable for prospective buyers or sellers. Whether rates are to continue to increase or level out is unpredictable however bankers we work closely with expect rates to continue to increase.
For a buyer it is as cut and dry that you will be paying more interest over the course of your loan term which results in a lower take home. For a seller, you should understand that a dental practice is evaluated on multiple variables but the highest weight dependent upon how a practice cash flows. Higher interest rates are going to affect the cash flow negatively which means your practice will be worth less. With rates continuing to climb we do not know where it will level out but if you are a potential seller this is something I encourage you to take into consideration and keep an eye on.
Practice Grossing $685,000.00 and how interest rate effect cash flow and purchase price.
5% Interest Rate = $494,570.00 Evaluation Price (72.2%)
7% Interest Rate = $450,730.00 Evaluation Price (65.8%)
9% Interest Rate = $413,055.00 Evaluation Price (60.3%)