“A recession is … uh… uh… something bad?” is the answer he gives and the laugh track plays over his look of uncertainty while the Man on the Street replies “There you go – a recession is bad!”
Phrase the question slightly differently and I think most of us feel like we are in the proverbial hot seat – “How does a recession impact you?” Your mind may first pivot to your personal finances and think of expenses you can cut back on. Then, your thoughts shift to your business and find a few revisions you can make to save some money, whether it’s counting the k-cups in the breakroom, adjusting materials and suppliers, or even the dreaded head count reduction.
But wait, what about your eventual plans to retire and sell the company? How does a potential disruption in the economy translate to the growing value of your company?
The short answer is no. The buyers still have the capital to invest sitting on the sidelines waiting for the right opportunity. However, they are just as aware that a macro disruption is in process and the economic risk is s the only risk that they want to incur when selecting a company to make an offer on. Any buyer who will be seeking financing either to support the purchase price or a line of credit required to operate the company will be feeling the pinch of cash flow reduction due to increased interest rates. Buying during a recession, historically speaking, can lead to a supreme win for them, if they find the right company. So, they aren’t going to stop looking – but they are going to be far pickier about what they decide to buy.
There is very little that can be done about the macro-economic environment. It will be the number one risk factor that every buyer will consider. Unfortunately, could decrease the multiple that you can expect to receive on your company. To be clear, the valuation would decrease from the boon of increasing valuations that we saw in 2021 and the beginning of 2022. This period may see a cooling of the hot prices and amazingly eager buyers.
Now, more than last year when people were signing deals that fell into their laps, it is going to be more important that you de-risk your company from the perspective of a buyer.
One aspect you as an owner can control is the economic preparedness of your company. Buyers are looking for a specific strategic plan on how and when to address economic downturn. The answer “We made it through the last recession” isn’t going to be enough information for them to take the risk in investing in your company. What are you specifically planning to do or change to make sure that you continue to maintain the same level of revenue or revenue growth that you have had the last three years? The word “pivot” (that we all hate after the pandemic!) is going to relevant if you are in an area that could be impacted by a recession. It’s time to make a strategic plan that looks at the goods and services that you currently offer and see if there is a way to maximize or contractually ensure recurring revenue. Recurring revenue will be king in securing offers with the highest multiples.
The focus on human capital post pandemic has caused companies to lose money due to transitional lag times, inefficient staffing and increased salary and benefit expenses. This is going to be a sensitive area for any buyer evaluating your company because it is likely something that has been a pain point in operating their own company. Typically, a buyer wants to know about the status of a management team and their involvement in the structure of the company. Do senior executives have a smaller ownership piece or an employment contract? Is there a bonus structure that keeps them enthusiastically involved in the profitability of the company? These factors are still vastly important. But the employee shortage in many industries has encouraged them to look at the lower-level staff and evaluate their roles, salary, and performance incentives. Buyers have begun asking questions about recruiting plans and retention plans. The workplace environment, a natural part of retention, is becoming a key factor in the risk assessment of an integration process. As an owner, knowing and planning for human capital retention is a distinct way to de-risk a transaction for the buyer therefore securing a better offer range.
Gone are the days of receiving multiple emails from people looking to find companies to buy. Getting your company in front of the people that are prepared to buy and have the money to complete the transaction will make a significant difference in ensuring you have what you need to be able to transition out of your business. Strategic buyers (larger companies within your industry that are privately owned) may not be the buyer in the best position any longer. Private Equity and Family Offices with committed funds are the ones that will be the main players since they have the available capital to complete a transaction.
You may be thinking, “How am I going to do this and run my business and weather the economic storm – there are not enough hours in my day.” You would be right. Preparing and exiting your business now will be smoother with the assistance of a professional team of advisors. Please contact us at Touchstone Advisors so that we talk to you about how we work to prepare and market businesses to get that optimum multiple. Reward your years of hard work with the support your deserve during the transition.