By John Zayac
In business sales, a company’s value can be influenced by many factors, some of which defy prediction or logic.
As an example, in our experience as M&A brokers, we have seen sellers achieve higher-than-expected prices for their businesses during a recession – not just despite the economic downturn but because of it – due to specific circumstances and market dynamics.
Here are six reasons why this phenomenon may occur.
1. Strategic Value. In times of economic uncertainty, some businesses may offer greater strategic value for some potential buyers. Acquirers might use a recession to diversify their portfolio, expand into new markets, or gain access to critical technologies or intellectual property. If your business possesses unique assets or capabilities that align with a buyer's strategic objectives, the buyer may be willing to pay a premium, recession or not.
2. Market Share. In a recession, industry consolidations are common. Companies seeking to gain a dominant market share or strengthen their competitive position might be willing to pay higher prices for acquisitions that grant them a significant market presence or eliminate competitors.
3. Scarcity of Desirable Targets. During a recession, many companies face financial challenges that would seem to impair their market value, causing their owners to keep them off the market. As a consequence of the resulting shortage, buyers may find a limited supply of high-quality businesses available for sale, and competition for those scarce targets can drive up the ultimate acquisition price.
4. Distressed-Asset Targets. Some investors and business buyers are intentional about acquiring distressed companies. These buyers are experienced in turning around struggling businesses and are willing to take on the risk associated with acquiring them. As a result, they may be more inclined to pay higher-than-expected prices if they see an opportunity to unlock a business’s potential through restructuring and/or operational improvements.
5. Future Growth Potential. Similarly, some sellers may possess solid long-term growth potential despite short-term economic challenges. Buyers that recognize that potential and understand how to seize it may be willing to pay a premium based on their belief that the business will rebound and generate strong post-recession returns.
6. Defensive Strategies. In a recession, larger and financially stable companies may engage in defensive M&A strategies to protect themselves from economic uncertainties. They might acquire smaller competitors or target companies in related industries to secure their supply chain, expand their customer base, or gain access to new technologies.
As valid as the motivations described above may be, they do not apply universally. Ultimately, a business’s market value – during a recession or an expansion – depends on a combination of factors, including the specific industry, the company's financial health, its growth prospects, the economic climate, and the motivations of potential buyers.
In any economic environment, would-be sellers should work with experienced M&A advisors to prepare their business for sale, respond to the complexities of the market, navigate the negotiation and due diligence processes, and achieve the highest possible value for their businesses.
John Zayac is a founding principal of IBG Business and managing partner in IBG’s Colorado office.
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