How Interest Rates Shape M&A Strategy

If you want to understand what’s happening in M&A, follow the money.

And few forces shape the cost — and availability — of money more than interest rates.

Over the past two decades, I’ve watched deals surge and stall based on one key lever: the cost of capital. When rates drop, deals accelerate. When they rise, the rules change — sometimes overnight.

For founders preparing for an exit, understanding how interest rates affect M&A strategy isn’t just smart — it’s essential.

Because interest rates impact everything: buyer behavior, deal structure, valuation multiples, and even who shows up at the table.

In this article, I’ll break down:

Why interest rates matter so much in M&A
How buyers shift strategies as rates change
What founders must do differently in high- vs. low-rate environments
How to optimize your exit timing and deal structure in any rate cycle

Let’s get tactical.

Why Interest Rates Matter in M&A

Interest rates directly impact the cost of capital — which fuels M&A activity.

Lower Rates = Cheaper Capital

Private equity can borrow more to fund acquisitions
Strategic buyers can justify higher valuations
Deal competition increases, which drives up multiples

Higher Rates = More Expensive Capital

PE firms get more conservative
Lenders tighten underwriting standards
Buyers reduce bid prices or ask for more structure

In short, when rates are low, deals move faster and prices trend higher. When rates climb, the market recalibrates — and founders must pivot with it.

The PE Playbook: Debt and Interest Rates

Private equity firms rely heavily on leverage to fund acquisitions. They borrow capital based on the future cash flows of your business.

When rates are low:

Their debt service is manageable
They can outbid strategic buyers
They’re willing to pay a premium for strong targets

But when rates rise:

Their cost of debt increases
Return models get squeezed
They become pickier — and slower to close

As I often say at Legacy Advisors: When rates rise, PE gets cautious — and structure gets creative.

How Strategic Buyers React

Strategic acquirers may not be as debt-dependent as PE firms, but they still adjust based on macro conditions.

In low-rate environments:

They pursue aggressive expansion
They compete with PE on valuation
They move quickly to lock up targets

In high-rate environments:

They focus more on synergies and integration
They delay or defer acquisitions not tied to core growth
They want clearer ROI and more conservative terms

Your story has to shift depending on which group is driving demand.

Founder Mistake: Ignoring the Cost of Capital

Too many founders set valuation expectations based on past cycles. If you’re expecting a 10x multiple because a peer got it two years ago — but rates have doubled since — you’re out of sync.

And worse, if you’re not prepared to defend your forecast in a higher-rate environment, buyers will doubt your credibility.

Founders need to:

Adjust expectations based on rate-driven market realities
Understand how their business looks to a leveraged buyer
Tell a story that reflects current financing conditions

This is where a partner like Legacy Advisors becomes invaluable.

How to Position in a High-Interest Environment

When rates are up, buyers want:

Stability over upside
Profitability over growth-at-all-costs
Clear margin visibility
Efficient operations
Strong cash conversion

You must present your business as low-risk, high-durability. This is not the time to lean on moonshot projections.

Tell the story of:

Customer retention
Operating leverage
Repeatable GTM execution
Sensible capital allocation

This is what gets deals done when money tightens.

The Role of Deal Structure

One of the biggest impacts of interest rate shifts is how deals get structured.

In low-rate environments:

Buyers offer more cash up front
Less contingent consideration
Faster close timelines

In high-rate environments:

Expect earnouts, seller notes, or rollovers
Buyers want downside protection
Founders need to stay flexible on structure

I’ve led dozens of deals in both conditions — and the winners are the founders who prepare early and stay open to creative, mutually beneficial terms.

Kris’s Take from The Entrepreneur’s Exit Playbook

Kris Jones shares in his book (read it here) that when capital is abundant, the deal environment rewards bold storytelling.

But when rates climb?

“Buyers stop buying the future and start underwriting the present.”

Kris and I agree: this is the key shift that every founder must internalize.

If your pitch relies on aggressive expansion assumptions, you’ll struggle in a high-rate market. But if you’ve built a business with cash flow discipline and strategic efficiency, buyers will still lean in.

What Interest Rate Trends Signal

Want to know what’s coming next?

Watch:

Federal Reserve guidance
Bond yield curves
Lender appetite and covenant trends
Private equity fundraising velocity
Strategic buyer earnings calls

If Fed policy signals ongoing rate hikes, PE firms will start modeling lower IRRs and tightening their acquisition criteria. If rates are forecasted to fall, expect deal momentum to build again.

Staying plugged in gives you the power to time the market without chasing it.

Ed’s Founder Checklist for a High-Rate Exit

If you’re selling during a high-interest environment:

✅ Have your financials clean and QofE-ready
✅ Demonstrate pricing power and gross margin stability
✅ Emphasize customer contracts and retention rates
✅ Be ready to explain how you’d manage with tighter capital
✅ Prepare for structure: earnouts, seller financing, etc.
✅ Work with a banker or advisor who understands how to run a competitive process even when the market is cautious

Deals are still happening — but only for businesses that signal certainty.

When to Wait (And When Not To)

There’s no shame in waiting if your sector is dormant and rates are crushing buyer activity. But waiting only makes sense if:

You have the runway to improve your business
You can preserve or grow valuation over 12–24 months
You’re not delaying out of indecision

Don’t wait because you’re afraid. Wait because you have a strategy.

On the other hand, if buyers are calling and you’re ready — don’t let rate trends paralyze you. Great businesses still sell well, even when rates are high.

Legacy Advisors Podcast Insight

On the Legacy Advisors Podcast (listen here), we’ve featured multiple founders and buyers discussing how they’ve shifted strategy as rates changed.

One common theme?

“You can’t control the market. But you can control how prepared you are when it changes.”

That’s our whole philosophy. Be ready before the wave hits — because the best exits happen when timing and preparation align.

Final Thoughts

Interest rates aren’t just an economic detail.

They’re a signal. A filter. A force multiplier.

They tell you what kind of deals are possible, who your likely buyers are, and how to structure a process that gets across the finish line.

As a founder, you don’t need to be a Fed watcher. But you do need to understand how rate environments impact valuation, buyer intent, and closeability.

When you do?

You stop reacting.

And you start controlling your exit — on your terms.

Frequently Asked Questions About The Influence of Interest Rates on M&A Strategy

Why do interest rates matter so much in mergers and acquisitions?

Interest rates directly affect the cost of capital — and since most acquisitions are funded at least partially with debt, this has a huge impact on how deals are structured and priced. When rates are low, capital is cheap, and private equity firms are more aggressive. They can afford to borrow more and pay higher multiples. When rates rise, however, capital becomes expensive. Buyers must adjust their expectations, often offering lower valuations or requiring more structured deals like earnouts or seller financing. As Ed Button, Jr. explains, rate changes don’t just influence financing — they fundamentally reshape buyer behavior.

What happens to M&A activity when interest rates increase?

M&A activity generally slows down in a high-interest-rate environment. Buyers become more selective. Private equity firms may pull back as their return models get squeezed. Strategic acquirers may wait for better financing conditions. The deals that do happen tend to be for businesses with strong cash flow, efficient operations, and low customer churn. Founders may also see more structured offers (less cash at close) or longer diligence timelines. That said, well-prepared companies still sell — the bar is just higher. Positioning, clarity, and preparation become even more important when rates are rising.

How should founders adjust their exit strategy in a high-interest rate environment?

Founders should focus on stability over growth, clarity over hype, and cash flow over projections. If your business is overly dependent on debt-fueled growth or future promises, buyers will hesitate. Instead, double down on profitability, retention, margin visibility, and operational efficiency. Be open to structured deals — many buyers will want earnouts or seller financing to protect against economic risk. And don’t be afraid to adjust valuation expectations based on current market comps. As Ed shares at Legacy Advisors, this isn’t about selling short — it’s about aligning your story with the current buyer mindset.

Is it still possible to get a good valuation when interest rates are high?

Yes — but you need to prove your business is low-risk and highly durable. Buyers are willing to pay strong multiples when they feel confident in future performance. That means having airtight financials, recurring revenue, efficient operations, and a clear growth path that doesn’t rely on excessive capital. You may need to negotiate structure instead of all-cash — but well-positioned companies continue to command excellent outcomes even during tight money conditions. The key is being prepared, proactive, and adaptable to the environment.

When is the right time to sell relative to interest rate cycles?

The best time to sell is when your business is ready and the market conditions align. In low-rate environments, competition among buyers may drive up your valuation. But in higher-rate cycles, it may be wise to proceed if your business is already strong and buyer interest is real — rather than wait for uncertain improvement. Timing the market perfectly is difficult, but preparing thoroughly and adjusting your strategy to rate trends is within your control. At Legacy Advisors, we coach founders to plan early so they can move fast — no matter what interest rates are doing.