Part 1: How Rising Capital Costs and Valuations Impact Small Business Exits

For small business owners considering an exit in 2025, the cost of capital and shifting market dynamics will play a crucial role in valuations and deal structures. Here’s what to keep in mind:

Higher Interest Rates Mean Fewer Buyers Using Debt

With bank loan rates now at 7-9% and mezzanine debt at 13-15.5%, buyers relying on debt financing face higher borrowing costs. This can reduce their willingness to pay premium valuations or force them to structure deals with more seller financing or earnouts.

Private Equity Is Still Active, but Returns Are Down

Private equity firms remain major buyers in the lower middle market, but their expected returns on buyouts have declined. Many firms are more selective, favoring businesses with strong EBITDA margins and steady cash flow. If your business is well-positioned, PE firms could still offer competitive valuations.

Valuations Have Shifted—Industry Matters

While EBITDA multiples have increased in some sectors (up to 7x for companies with $10M EBITDA), venture-backed startups and lower-revenue businesses are seeing declining revenue multiples. If your industry is cooling down in investor demand, you may need to adjust price expectations or explore alternative buyers, such as strategic acquirers.

More Deals Falling Apart Due to Valuation Gaps

Investment bankers reported that nearly 50% of failed deals were due to pricing mismatches. With changing market conditions, it’s critical to get an accurate valuation early and remain flexible in deal negotiations.

Bottom Line

If you’re planning to sell, expect more scrutiny from buyers and possibly lower upfront cash offers. Well-prepared businesses with strong financials and clear growth potential will still attract buyers, but understanding financing trends can help you position for the best possible deal.