Interest rates are a key driver of business valuation asthey have an impact on both the cash flow for the company and the returnsexpected by investors. Over the past several years, interest rates have provento be highly volatile, shifting from the near-zero rate environment of the late2010s and early 2020s, followed by a period of materially higher interestrates. As interest rates are currently declining, valuation professionals andbusiness owners are left to consider how this changing rate environment mayaffect business valuation conclusions.

Current Interest Rate Trends

Based on information sourced from the December 2025 NationalEconomic Report produced by KeyValueData, interest rates have undergone greatshifts. After the pandemic in 2020, the interest rate reached its second near-zerolevel in recent history. In January of 2022, the Fed began increasing interestrates in an attempt to fight inflation.

In 2024, interest rates reached a steady peak that wassustained for a few months but has been on a steady decline since. As ofDecember 2025, the federal funds target range stands at 3.50%–3.75%. Along withthis, prime rates fell from 8.50% in August 2024 to 6.75% by December 2025,easing borrowing costs for businesses. The same trend has been seen in 30-yearfixed mortgage rates and credit card rates.

The Impact of Interest Rates on Valuations

There are multiple factors in business valuation that areimpacted by a change in the interest rate. Three of the most impactful factorsare the discount rate, cash flows, and capitalization rate.

Interest rates directly affect the base of the discount ratethrough the risk‑free rate, which represents the return investors can earnwithout assuming risk and serves as the foundation for both the cost of equityand the cost of capital. The cost of equity is calculated by adding variousrisk premiums to the risk‑free rate, while the cost of debt is also influencedby prevailing interest rates. As interest rates rise, investors demand morereturns to compensate for opportunity costs, and borrowing costs become higher.Conversely, when interest rates decline, required returns and borrowing coststend to fall, directly affecting the discount rate and, in turn, the presentvalue of future cash flows.

What This Means for Business Owners and Valuation Conclusions

That said, decreasing interest rates do not automaticallytranslate into a higher valuation. Interest rates influence valuations throughdiscount rates, cash flows, and capitalization rates, but these effects areheavily shaped by company‑specific risks and long‑termexpectations as well. Businesses with higher perceived risk may experiencelimited valuation benefit from falling interest rates, but the assumed higher company‑specificrisk premiums can offset the effects of lower base rates. For business owners,this highlights the importance of managing company‑specific riskand strengthening sustainable cash flows, while also keeping in mind markettrends.