For many CEO Founders and entrepreneurs, selling a business during a recession might seem a fool’s errand. Unless forced to do so by a dire need for cash or serious health issues, why would a business owner try to sell in an economic environment that by many measures is weak or collapsing?
The reality is every business is unique, as are the timing and reasons to sell. For businesses that are well positioned, a recession can actually be an ideal time to sell. However, the “why” that is driving a business owner’s desire to exit should come first. Do you want (or need) to be more “liquid”? Are you in need of working capital? Are health issues forcing you to step back? Perhaps you are just “done.” Ultimately, that “why” is what should drive the timing of a sale. Whether or not we are in a recession should not be the driving factor to sell or not sell. A contributing factor, absolutely, but not the primary reason.
With the “why” established, for businesses that are operating in a position of strength and are thriving, selling a business during a recession can be very advantageous. Financial buyers may fear the business will cost more later; strategic buyers may see the business as providing a lift during difficult times.
The realities of selling a business during a recession
There are a number of sobering realities that come in to play during a recession that business owners should be aware of. Many potential buyers are bracing their own businesses for the recession, which can include cutting costs and reserving assets for a rainy day. They may be less apt to dedicate resources to acquiring and integrating a new business. Also, many business transactions have a significant debt component. During a recession, lending gets tighter and underwriting becomes more stringent. That means it can be more difficult for an acquiring firm to access the capital it needs. Not to mention, the cost of credit can also go up, making a transaction potentially quite costly and hard to justify.
However, there is always capital available for great opportunities. For business owners looking to sell, the key is to make your business look as attractive as possible. Buyers will of course try to pay less in a recessionary environment, but if you can demonstrate your business is healthy and likely to continue to thrive in a challenging economic environment, that may increase the enterprise value of the business. It’s an asset for “all seasons,” which is often hard to come by. Your business could even be worth more than when the recession started. Resiliency can be a strong tailwind for certain businesses.
So, ask yourself, are you on your toes leaning in from a position of strength, or are you on your heels waiting for the market downturn to be over and hoping you survive? Know where you stand and let that help guide your decision to sell and the type of structure you pursue.
Instead of selling, consider going on the offensive
If you truly believe you are a business builder, as most entrepreneurs do, you may want to consider delaying a sale, and instead acquire some of the weaker or more fearful players in your industry, or perhaps pursue a strategic transaction that enhances your products and capabilities. In other words, if you have the appetite, go on the hunt. There are likely some good values among your peers and competitors. Lean in if you have the desire and potentially make 1+1 = 3.
Preparing to sell your business
If you know why you want to sell, and after a thoughtful analysis have determined that now is the time, the next step is to build an unconflicted advisory team to help you understand your options. Work with a fiduciary whom you trust to help you think through all of your options and make informed decisions. There are many pathways to explore (partial sale, recapitalization, leveraged buyout, ESOP, to name a few). Obtain an objective view of your various options based on your unique circumstances. Keep in mind, incentives drive outcomes. If you ask a business broker if you should sell, most roads lead to “yes.” Work with an unconflicted team to truly understand what’s best for you based on the factors above.
Just remember that during a recession, nothing moves fast. Lenders and underwriters are in no hurry and are often extra cautious. Everything gets a bit more complicated during a recession, so it’s important to build that into your timeline.
Recessions can be challenging and angst inducing, but don’t necessarily fear a recession if you are a business owner exploring a sale. Take it seriously and understand the environment in which you operate, but for a great business that is well run and positioned for long-term success, or that has a unique attribute that a buyer needs or wants, that business can attract a premium. Be that “diamond in the rough.”