The signs are everywhere: layoffs, interest rate hikes, and increased consumer uncertainty. Most experts agree that a recession is looming. But whether the recession comes now, next month, or next year really doesn’t matter. That’s because recessions are an inevitable aspect of the economy, and sooner or later, the economy will contract. Any business can succeed when the economy is booming, but the real test of a company is its ability to remain flexible when times are lean and uncertain. Business owners considering their exit plan should carefully weigh the effects of a recession, especially if that exit plan includes M&A.
Recessions: Bad for M&A, With Some Caveats
It should come as no surprise that recessions are bad for M&A. Some of the challenges owners will face include:
- More scrutiny from buyers, who become more risk-averse during a recession.
- A tighter credit market that may constrain the number of qualified buyers and the amount they are willing to pay.
- Decreased demand for their goods and services.
- Difficulty making future projections.
- The uncertainty of the recession itself—when will it end and what will be the impact?
Owners should expect that the M&A market during a recession will not be the thriving marketplace it was over the past few yeas. Valuations will be down. Sales may take longer, and due diligence may become significantly more stressful.
The Exception to the Rule
The exception proves the rule, and this is the case with businesses, too. Recessions are challenging, but they also present opportunities. Businesses that can solve the problems consumers face, innovate in the face of adversity, and continue to thrive grow in value, and make a stronger case to sellers. So owners who are on the fence about selling or who have time to wait may want to consider what they can do to use the recession as an opportunity for growth.
Delaying M&A vs. Moving Forward
For business owners contemplating a sale in the immediate future, the lowest risk time to sell is now. That might seem counterintuitive, but here’s the reason risk multiples over time: If an owner knows they need to sell, and knows a recession is likely, it’s impossible for them to predict the effects of that recession. In the current market, interest rates will likely continue to rise as the economy contracts, reducing the purchasing power of each dollar and potentially shrinking the pool of qualified buyers. Until this trend reverses, risk increases and value declines. Similarly, it is impossible to know when the recession might end. So if an owner’s financial prospects depend on selling, or they are at the precipice of retirement with a strong company, it makes sense to avoid testing the company’s mettle through a recession.
Otherwise, though, owners must consider that a recession is time to regroup, clean house, get the books under control, and prepare for sunnier times. Weathering the storm will make a strong case for M&A in the future.