^{Originally published by California Business Journal}

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Paul Cheetham, business advisor & founder, shares his take on how Federal Reserve decisions impact business valuations.

• By Roberta Silverglate, California Business Journal

The Federal Reserve is making moves, and California business owners are watching closely. After all, savvy business owners know that the value of their companies can move right along with those decisions.

“Both a bayside bistro owner with an adjustable-rate loan and a SaaS startup in San Jose can expect to feel the shift,” predicts Paul Cheetham, founder of Vanla Group. “Fed decisions drive valuation. They lower the cost of money and reshape risk.”

How Paul Cheetham predicts the recent rate change will impact California businesses

Business values tend to rise when borrowing gets cheaper and when a company brings in more money. The good news is that a rate cut can help on both of these fronts.

Lower rates can encourage buying. In addition to that potential revenue boost, business owners with adjustable-rate loans should see real interest savings.

“More sales plus lower interest bills mean more money left over,” observes Cheetham. “These factors can combine to increase a company’s value.”

Rates may be dropping, but experts expect lenders to remain selective. “Well-run companies with clean books and solid profit margins will see the biggest gains,” remarks Cheetham. “Businesses built on optimistic forecasts without clear proof will face tougher questions and may get lower valuations.”

Patience is key, as the effects of the rate drop won’t show themselves right away. Some buyers will hold out for better terms, but this caution can slow deals in the short term.

Will there be more rate changes for California businesses

“This cut could be the first of several,” Cheetham says. “If inflation cools and labor remains strong, I see a good possibility for incremental cuts through next year.”

Put simply, a window is open for California businesses. “Now is the time for small and mid-sized businesses to refinance,” Cheetham advises. “Just think about this: every 25-50 basis points you shave off floating debt can meaningfully increase your free cash flow and debt service coverage.”

Cheetham sees the upcoming months as the time to lock in certainty. “If tariffs or other pressures reignite inflation, the Fed could pause or reverse course,” he warns. “Term out your debt now and fix your rates where it makes sense. Run scenarios for both lower and higher rate paths so your plan survives either outcome.”

Why small- and mid-sized businesses are more sensitive to rate changes

Small- and mid-sized California businesses can expect to feel these rate moves first, since big companies can lock in fixed rates. However, smaller ones usually can’t because they frequently rely on bank loans and equipment financing that often have variable rates, meaning Fed changes show up quickly in their monthly payments.

“Smaller businesses have smaller cash cushions and thinner profits,” says Cheetham. “This means even a 0.25% change can affect real choices about payroll and inventory.”

Which sectors will feel the rate cuts most?

Auto sales and consumer services are among the top California sectors hoping to see a benefit from the rate drop. Large purchases depend on financing, and lower rates can bring back buyers who were waiting.

California’s restaurants and hotels also hope to see a boost from lower payments on variable loans, freeing up cash. If people feel better about the economy, they’re more likely to splurge on meals out and on vacations.

In commercial real estate and construction, companies expect that the cheaper borrowing will make projects workable again. However, lenders still want to see strong developers and tenants lined up before lending.

Venture-backed tech and subscription software also want to see valuations improve as rates fall. But today’s investors are favoring efficient growth, not just fast revenue growth.

What California businesses should look out for in 2026

Cheetham’s 2026 checklist blends optimism with pragmatism, especially for business owners with greater cash flow. “Because valuations are based on EBITDA, which removes interest costs from cash flow, lowering of interest rates won’t necessarily increase the value of a company, but having more cash flow to invest into the business to improve profitability will increase the company’s value and attractiveness,” he says.

And while tariffs are showing signs of easing, they remain unpredictable. “If they push inflation higher, the Fed may slow or reverse cuts, which will put pressure on valuations baked in cheaper money,” Cheetham reiterates.

The coming year will be one of credit selectivity. Even with lower headline rates, underwriting could stay tight. Clean financials and strong cash flow will secure better terms, but businesses with sloppy numbers will end up paying for it.

Businesses should also watch for possible tax changes after 2025 that could affect the federal rules around what businesses take home when they sell. “In a high‑cost state like California, even small tax changes to exit proceeds can move value,” remarks Cheetham. “It’s not a bad idea to run a few tax scenarios now.”

Fed cuts can be a lever on valuation. Across the state, easier financing draws customers in. Lower interest costs free cash, and owners feel immediate relief.

“Use this window to take action while conditions are good,” concludes Cheetham. “Refinance and update your plans for today’s rates. Focus on turning your growth into profits and back your business narrative with solid data.”

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^{Originally published by California Business Journal}

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