Inflation now feels less urgent than it did during the peak of 2022, but for entrepreneurs, the issue is by no means gone. The sharp price increases of that time have translated into a new cost level: higher wages, more expensive purchases, rising energy costs, and an interest rate environment that is fundamentally different from the era of cheap money.
This means that inflation is no longer just a macroeconomic figure, but above all a practical question for entrepreneurs: Can they pass on higher costs, maintain margins, and continue to generate sufficient free cash flow? It is precisely these factors that largely determine a company’s value.
Impact of inflation on cash flows
One of the most direct effects of inflation is on future cash flows. Higher costs for raw materials, labor, energy, transportation, and external services put pressure on profitability. Companies can mitigate that pressure by passing on cost increases to customers in a timely and convincing manner.
However, that is not always possible. The scope for doing so depends on competitive position, contractual agreements, customer relationships, and the extent to which customers accept price increases. Businesses with a strong brand, distinctive products, or a dominant market position generally have greater pricing power than businesses in highly competitive markets.
For a buyer, it is not only the reported EBITDA that matters, but above all whether the expected profit translates into sustainable free cash flows in the future.
Impact on the discount rate
The discount rate also plays an important role. In valuations based on future cash flows, the present value of those cash flows is considered. When higher inflation expectations are reflected in market interest rates and required rates of return, the discount rate may rise. As a result, future cash flows are worth less today.
Even with stable EBITDA, de ondernemingswaarde can come under pressure if the cost of capital increases.
Debt and Capital Structure
In addition, the capital structure is important. For companies with fixed-rate debt, inflation can be favorable on paper, because the real value of future repayments decreases. At the same time, companies with variable-rate debt, short-term financing, or an upcoming refinancing event are actually impacted by higher interest expenses.
This reduces free cash flow and limits financing capacity. Buyers and financiers therefore take a more critical look at the relationship between debt, interest rate sensitivity, and cash flow capacity.
Strategic adjustments
Business owners can take various steps to manage the impact of inflation. A thorough analysis of product groups, customers, and margins is essential in this regard. Not all revenue contributes equally to the bottom line. Sometimes it makes sense to phase out less profitable activities, renegotiate terms, or focus more strongly on profit contribution.
In addition, inflation calls for an active pricing policy: price increases must be implemented in a timely, well-founded, and consistent manner. Cost control also remains important, for example by comparing suppliers, streamlining processes, and making better use of economies of scale.
Working Capital as a Key Consideration
Finally, working capital deserves special attention. Higher inventory levels, longer payment terms, and rising purchase prices place greater demands on liquidity. Replacement investments may also prove more expensive due to higher price levels.
As a result, stable EBITDA does not necessarily mean that free cash flow will remain constant. By closely managing accounts receivable, inventory, and accounts payable, a company can limit interest expenses and create room for controlled growth.
Conclusion
Inflation thus affects a company’s value on multiple levels: through margins, free cash flows, cost of capital, and financing risk. Anyone considering a sale would be wise not only to substantiate the EBITDA but also to explain how pricing policy, investments, and working capital influence future cash flows. This gives a buyer greater confidence in the sustainability of the results and strengthens the position at the negotiating table.
