M&A Recession Considerations: Preparing for Growth & a Future Exit After a Market Downturn

If you’re not planning on selling your business today or in the next 12 to 24 months, then surely you’re looking toward selling it after the next recession, right?

Selling on a macro-market downswing is perhaps the worst possible scenario for any business owner considering a sale of the business. Buyers may love it, but the M&A game is unfortunately zero sum, favoring buyers in the event a recession hits.

Mergers and acquisitions have been on a tear over the last several years and it does not appear the M&A tsunami will abate anytime soon. Unfortunately for many current business owners and would-be sellers, timing may not be precisely right for selling this year or next. Perhaps you need to pad the nest-egg a bit more before jumping into a full liquidity event or maybe, you actually like operating your business and have no idea what you would do in the event of a sale.

Whatever your reasoning for not selling (and there are many), the following considerations should be helpful in preparing for your sale and the maximization of your exit value in light of exogenous, systematic macroeconomic events (e.g. recessions, downturns, etc.).

Avoiding a Sale in a Down Market

The captain-of-the-obvious statement is not to sell into a downturn. It goes without saying that macro trends tend to wipe out value across the board, including in the middle and lower middle market. No, the best option is to sell in the peak of a bull market.

While the statement is obvious, some owners may fail to truly plan in this way as they may be actively spending more time working IN their business than ON their business. In addition, they may be tied (directly or indirectly) to markets that with a high beta correlation to the overall market. Examples include construction, oil & gas and luxury items. Investment bankers also fall into this high beta correlation category.

The less obvious way to avoid selling in a down market is to prepare to sell in an good market. It is less obvious because many business owners may fail to realize the following:

1. Waiting to sell into the next recession may cost you more in real dollars than selling today–something that can be modeled with some general accuracy and simulation.
2. It can take 12 months or more to truly prepare your business for the optimal exit (financially, operationally, etc.) and another 12 months to go through the M&A process with your investment banker. It’s not a wake-up-one-morning realization that, “I think I’m going to sell my business today.”

The overarching consideration of when to sell is critical. Timing means almost everything in mergers and acquisitions. Timing will significantly alter any potential valuation and premiums for your business.

If you do not plan to sell today, plan on doing so after the next downturn in the following ways:

• Recession-proof your business. Add products and services that will still remain in high demand (and even higher demand) during an economic downturn.
• Diversify your customer-base. Where possible, expand your customer base to ensure customer power is significantly decreased. If no customer holds >5% share of your overall revenue, you can rest assured that if a downturn hits, you are not likely to see a massive, immediate drop in your overall revenues and business value should remain intact.
• Divest or sell un-performing and under-performing product lines. Focus on your core product or service, where possible and eliminate areas that are a financial drain.
• Strengthen your balance sheet. Is your business services a large amount of debt? If so, how does that debt impact your cash flow? It is doubly wise to pay down debt more rapidly when things are going well.

Silver Lining: Post-Recession Success Favors the Prepared

Recessions typically do a couple of things. First, recessions separate the prepared from the unprepared in that winners in recessions typically emerge stronger than the competitors. If you are prepared for the next downturn, then you are likely to emerge in a better situation once the next up-cycle hits.

Second, recessions consolidate power. Both organic and inorganic growth options tend to crop up during recessionary periods. If you are currently running as a market leader in your niche, you are likely to see other market players exit or go out of business. This will inevitably create a vacuum of demand for your particular product or service, allowing you to swoop in and scoop up some of the excess.

It will also inevitably create the opportunity to purchase other assets, businesses and securities during a time when others are running for the hills and pulling cash out of everything. It’s the oft-quoted Buffett adage that rings true here:

Be fearful when others are greedy and greedy when others are fearful

If you prepare for the next recession with the right amount of capital sources, including your own balance sheet’s excess cash, then you’ll be ready to swoop in and scoop up competitors and their customers at a fraction of your current customer acquisition and M&A cost.

I actually surmise there are many that may be reading this who may already be thinking and preparing in this way, stockpiling capital and preparing for the next “big one.”

If you have a cash-flow-positive business, selling tomorrow may not be a bad move. Extracting the cash flow in the interim plus the ability to extract your value on exit when valuations creep-up across the board, is likely the right move for most who are not prepared to sell today.

While selling a business is most often the personal decision of the current owners, it should be more based on analysis than emotion. Review the following high-level macro considerations when planning on selling your business in light of a recession:

• Industry
• Cash Flow (Current and Historical)
• Historical Performance in Downturns
• Competitors
• Suppliers
• Balance Sheet (Debt, Equity & Assets)
• Employees, OPEX & cash flow coverage of fixed expenses
• Timing toward close
• Potential suitors
• Size/valuation of your deal

Volumes could be written on assessing each of these items in light of an impending market meltdown. Each will play a significant role in the success of your exit as you consider both internal and external factors relating to value.