How M&A Will Respond to Next Recession

The takeaway for business owners: Get back to basics. Don’t worry about hyper growth. De-risk your company as much as possible.

The M&A world isn’t quite sure what to expect in the next recession. Private equity players weren’t nearly as dominant through the last market downturns. But today those firms have $1.8 trillion in uncommitted capital they need to put to work. With money to spend, and a timeline to do it, private equity may help keep valuations healthy.

Businesses have been earning some of the healthiest valuations we’ve seen in decades. If we can see that kind of activity in times of economic uncertainty, dealmakers are optimistic we won’t see a painful drop in the months and years ahead.

Even with tons of “dry powder”, private equity is expected to be selective in making deals. Similarly, strategic and synergistic buyers – the types we at BTS primarily deal with – will be careful in finding the right fit.

Here’s some things likely to show up in the months ahead:

Is it a good fit: Strategic buyers want to find companies that fit their long term strategy. This can be to expand to a new region or to flesh out capacity. This will continue even in uncertain times when the right opportunity emerges. Presenting things effectively helps bring the potential fit to the forefront. Many times, private equity funding is behind business expansion efforts. Good sales processes organized by experienced M&A advisors help to make the case to the market.

Flight to quality: An investment phenomenon, “flight to quality” occurs when investors start shifting out of risky assets during financial downturns. While the M&A market itself is certainly not in a downturn, we will likely see buyers be more selective – focusing on the consistent performers to the exclusion of “big opportunity” entities with unproven potential.

With a maybe-recession ahead, buyers are looking for companies with predictable performance, solid margins, and low customer concentrations. Unicorns are out. Work horses are in. Or, to use another analogy, buyers will be looking to hit singles and doubles rather than taking the chance on a home run.

The takeaway for business owners: Get back to basics. Don’t worry about hyper growth. De-risk your company as much as possible.

Market efficiency: With private equity at the table, we continue to have more buyers than desirable sellers in the market. It’s easier to buy and sell businesses right now, so timelines are shrinking.

Traditionally, it takes 9 to11 months to sell a lower middle market business, but there’s a general sense of urgency and competition that’s speeding things up. Motivated buyers are at the table.

Resiliency in M&A: The market will slow down. But good companies sell in any market. Private equity and strategic buyers have money – or can find it fairly quickly – to deploy in an acquisition. Meanwhile, strategic buyers will need alternative avenues for growth as long as the tight talent market constrains organic expansion.

We could see a recession in the future, but it likely won’t have as big an impact on M&A as the past.

What our clients are saying...

“Regarding our working relationship with Business Transition Strategies. After 32 years of continuous growth we hit 2009 & 2010 and like many companies we went flat and in 2010 had our first loss. At this point we knew we had to make changes if we where to succeed in this new economic environment. Business Transition Strategies (BTS), particularly John Howe and Ken Schaefer, were brought on as consultants. The BTS team came in, evaluated everything in a professional and thankfully non-threatening manner. They interacted with all employees and our professional partners. Once this was done they presented their findings to the executive group and gave very specific suggestions for improvements. This done and a plan in place, John & Ken continued to help us move forward and implement changes and make adjustments where needed. I am happy to say we are back to being a growing and profitable business and I believe BTS played a big part in making this happen. I would recommend to anyone that they include BTS as part of their business plans for the future.”

- Christina

Advisory Client