As the Reserve Bank of Australia (RBA) begins a cycle of interest rate reductions following a period of aggressive tightening, a new era is dawning for mergers and acquisitions (M&A). For Australian business buyers and sellers - particularly in the mid to large enterprise sector—these macroeconomic shifts are not just impacting valuation models; they're actively reshaping the way deals are structured.
Historically, high interest rates dampen deal volume and limit the availability of leveraged buyouts due to increased cost of capital. In contrast, a reducing interest rate environment creates fertile ground for transaction activity. As borrowing becomes more affordable, private equity firms, strategic acquirers, and family offices can pursue acquisitions more aggressively and creatively.
Lower rates also improve debt servicing ratios, allowing buyers to increase their borrowing capacity, and hence, their purchasing power. For sellers, this broader pool of qualified buyers can mean higher valuations, quicker sales cycles, and more flexible negotiations.
Higher Proportion of Debt-Funded Transactions
With financing becoming more accessible, there is a renewed interest in leveraged deal structures. Obtaining business finance in Australia becomes easier with lower interest rates. Buyers are using a greater proportion of debt in capital stacks, reducing equity dilution and increasing returns on investment.
Deferred Consideration and Earn-Outs Are Evolving
While earn-outs and deferred consideration have long been used to manage valuation gaps or mitigate risk, declining interest rates are making these structures more attractive. Buyers are more comfortable offering larger back-ended payments, as the opportunity cost of delayed capital deployment decreases.
Stronger Role of Vendor Finance
Vendor finance arrangements - where the seller lends a portion of the purchase price - are experiencing a resurgence. In a lower-rate environment, sellers are more willing to accept instalment payments with modest interest, particularly if it can help secure a higher overall valuation.
> Learn more what Vendor Finance is and when to offer it.
Repricing of Risk and Growth Assumptions
As borrowing costs drop, acquirers are more inclined to pay higher multiples for strong, cash-generating businesses, particularly in defensive industries. Growth expectations baked into deal valuations are also being recalibrated upward, given the anticipated rebound in economic activity stimulated by rate cuts.
In late 2024, a national freight and warehousing operator based in Victoria acquired a well established logistics company in Queensland for approximately $38 million. The deal, brokered by Lloyds Business Brokers, is a clear example of how the interest rate environment reshaped the transaction structure.
The buyer, backed by a mid-market private equity group, was able to access a blended interest rate facility at just under 5.2%, significantly lower than rates seen the previous year. This allowed them to finance over 70% of the transaction with debt. The seller agreed to a 10% vendor finance component with a three-year repayment horizon and a fixed 4% interest rate, confident in the business's continued cash flow under new ownership.
Additionally, a $5 million earn-out was included based on EBITDA performance targets over the next two financial years. In previous years of higher rates, such an earn-out would likely have been discounted more heavily by the seller - but in this case, both parties viewed the structure as low risk and fair.
For buyers, now is an opportune time to revisit acquisition strategies and explore deals that may have previously been out of financial reach. Access to cheaper capital enables more ambitious plays, particularly in fragmented sectors where consolidation can yield scale advantages. Buyers can more easily leverage debt for business acquisitions.
For sellers, it's critical to prepare for increased interest and be flexible in negotiating deal structures. Having clean financials, robust growth projections, and a solid management team can significantly enhance value in a buyer's model - especially when those buyers are under pressure to deploy capital efficiently in a low rate environment.
Australia's shifting interest rate landscape is opening new doors for deal-making in the mid to large business sector. While valuations are still driven by fundamentals, the structure of how deals get done is adapting rapidly to the changing cost of capital. Whether you're a buyer looking to expand or a business owner preparing to exit, understanding these dynamics is key to optimising outcomes.
Need expert guidance?
Lloyds Business Brokers specialises in structuring successful business sales and acquisitions in this evolving economic environment. Contact our team to discuss how we can help you navigate your next transaction.
