We were asked recently by an attendee at one of our exit planning conferences: When will the next recession hit and what impact will it have on M&A activity?
The answer is: It depends.
First, it depends who you talk to. It appears that there is some consensus among economists that the next recession will most likely occur sometime in 2020. In fact according to analysts with Morgan Stanley, “There's a 30% chance of a recession in 2020.” Which also means that there is a 70% chance that there won’t be one.
However, assuming that these economists and Morgan Stanley are correct, the answer to the second part of the question (how it will impact M&A activity) is that it will all depend on the length, the severity, and the factors causing it.
The last recession, aka, the Great Recession, had a huge impact on all segments of the U.S. (and the world) economy given how long it was, how deep the drop in GDP was, and the fact that ultimately bubbles in the financial sectors drove us into the recession.
The analysts we follow at Generational Group are not predicting a deep and long recession in 2020, largely because the financial sector, due to both new federal regulations and greater self-control, has avoided the rampant speculation that caused so much distress during the Great Recession.
In addition, most businesses in the U.S. and Canada that are privately held can be classified as lower middle market companies (valuations tend be below $50 million in this segment). The ability to finance transactions is much easier for this group compared to the billion-dollar deals of larger companies. In other words, it is simply easier to obtain financing for a $10 million deal versus a $100 million deal during recessionary times.
So we are expecting a negligible impact on our ability to close deals even if a recession hits in 2020.
But what about...
What is virtually impossible to predict is the impact that fewer buyers (which is ultimately what recessions cause) will have on valuations in general. For example, at the end of 2018 valuations of privately held companies were at the highest levels in ages.
2018 was a good year because there was lots of competition among buyers for a limited supply of well-run privately held companies. Also, demand was driven by confidence in the economy on the part of professional buyers. This was backed by significant capital and financing available to close deals.
So deals still get done in the lower middle market despite recent economic gyrations. However, valuations do drop. How much they drop depends on the impact of interest rates on financing (among other factors).
Based on our analysis, right now and most likely for the next 12 months at least, we expect to see a continuation of our current seller’s market.
Thinking of Selling Your Company? You’ve Got Options
The reality is this: No matter what economic cycle we are in, every business owner will eventually need to exit their company in some fashion. This is especially true for baby boomer business owners who are facing retirement in record numbers.
The good news is that you have several options if you’re ready to sell. The bad news: Many of these options could negatively impact you financially. Here are the most common options considered by business owners:
The important thing is: You have many options. The sooner you start the exit planning process, the better you’ll be able to find the option that best matches your needs.
Fortunately, Generational Group holds complimentary exit planning conferences throughout North America. Attending one of these day-long events will provide you with a significant amount of the information you need to start planning for a successful, profitable exit no matter what the economy is doing.
To learn more about how we can help you get the most from the sale of your company, use the following links:
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2019 Generational Equity, LLC. All Rights Reserved.
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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