Mergers and Acquisitions During a Downturn Part 2: The Seller’s Perspective

Last week, we discussed mergers and acquisitions during a downturn from the buyer’s perspective. Though many buyers may be hesitant to purchase during a recession, there are many potential benefits for a business. Some include less cash needed to make a transaction, cost reductions post-transaction and low interest rates. For more insight on M&A during a recession from the buyer side, click here.

This week, we’ll discuss M&A in a downturn from the seller’s perspective.

The seller’s perspective

Often, a financial downturn will delay plans for selling a company—largely because of the historic reduction in acquisition multiples combined with a coincident reduction in financial performance. The combination of these two factors could dramatically reduce the price a seller receives for their company. However, there still can be opportunities to sell in a downturn. Financial distress could make continuing operations unsustainable, or the owner’s personal situation could necessitate a sale for a number of reasons, such as health, death in the family or need for capital for other issues.

Risk (and reward) sharing deal structures

While it is true that valuations tend to trend lower in a downturn, sellers can take advantage of deal structures designed to share risk with an acquirer and secure long-term value. Sellers can share risk (and reward) with a buyer by accepting more consideration in earn-outs or performance bonuses, issuing seller debt or taking equity in the acquiring entity. Many buyers welcome this risk sharing, as it is indicative of the seller’s belief in the long-term viability of their business. While it is very likely that selling during a downturn will reduce cash-at-close proceeds, a properly structured deal could very well preserve a full, or near-full, valuation for the seller.

Weathering the storm alone vs. with another company

A final consideration for a business owner is the risk to the business by “going it alone” through a downturn. By definition, business owners are entrepreneurs, and entrepreneurs tend to be optimistic in their capabilities to build and run a business. As optimists, business owners often overestimate future business performance and underestimate financial and market risks. Despite the business owner’s capabilities, it is not uncommon for a good business to fail during a severe economic downturn. Bankruptcies in the U.S. rose to almost 45,000 businesses in 2008 and over 60,000 in 2009, before a gradual drop to under 30,000 per year in 2014 (roughly the same level as in 2007). A savvy business owner considers the risks facing the company and options available to them when deciding on a proper course of action.

Sometimes, the most optimal decision is to seek the sale of the company to a buyer that has the infrastructure and resources available to help weather the financial storm, or even to thrive in it. Many of the businesses that failed between 2008 and 2014 may have had the potential to survive if the owners considered options like taking on investors or selling to another company.

A seasoned M&A advisor can help a business owner evaluate the risks they are facing and the options available to them.

Working with an advisor

A financial downturn does not need to mean the end to M&A activity.  It is often wise to evaluate risks and opportunities carefully when the economy places stress on a business. Whether a company finds itself in a position to buy or to sell, the use of an M&A professional can often be the difference between creating value or expanding risks.

For a seller, an advisor can act as a second set of eyes in identifying and evaluating potential business risks versus alternatives available to the business owner. The advisor can help to create a strategy for a company sale and work to optimize the value delivered to the seller by creating competition between strong buyers and negotiating favorable deal terms.

If you haven’t read part 1 of this series, click here to learn about mergers and acquisitions in a downturn from the buyer’s perspective.

Our investment banking professionals stand ready to help your organization navigate mergers and acquisitions during our current crisis. Reach out to the team today.

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