Are we in a Recession or Not? Does it Matter When Considering Selling your Business?
Many have discussed whether the current US economy meets the definition of a recession because of the slowing growth quarter over quarter. However, others are saying it doesn’t feel like a recession because consumer spending is still happening and there is a very low unemployment relative to other recessions. It seems like the point is far from settled. However, for business owners contemplating selling, the real question is: does any of that matter?
In short, it depends on what business you are in and what is the cause of the recession discussion. Anytime there’s talk of a recession, credit markets tighten up – meaning lenders are less willing to lend the same amounts and on the same terms as they were open to before. Equity investors tend to move away from businesses that may not navigate through the recession well to those that are more recession resilient. For example, an investor may decide to pass on a business that derives a large percentage of its sales from new single family housing construction and instead look for a business that offers subscription-based service to K-12 education facilities.
In the current environment, many are concerned over slowing residential home sales, rising interest rates and more expensive goods, making investors pay close attention to how businesses are affected by those and other factors going forward. For example, if your business is heavily dependent on your customers borrowing money for large capital projects that may be put on hold due to increased interest rates, you’ll likely see downward pressure on the valuation of your business. Investors will view the future outlook as less desirable than the historical performance of the business, being more conservative in their valuation. However, if your business is in an industry where the services or goods you provide are needed regardless of the cost, your business is likely to have an enhanced value during this economic time.
The primary reason is simple: supply and demand. Trillions of dollars in capital from investors, companies, and others are available for investment. In normal economic times, there is a shortage of quality deals in which to invest. This shortage is heightened during periods of economic turbulence, as the bar for what is a “good” deal is raised. Now, you have the same amount of money chasing fewer deals, forcing investors to increase their valuations to ensure they can deploy capital into good opportunities.
If you are thinking about selling your business right now, it’s worth asking yourself the question: “Is my business one that investors are going to value more, less or the same as in normal economic times?” While capital markets are still fairly open and valuations haven’t dramatically changed for most businesses, valuations could see an impact over time, as less debt is available and the debt that is available requires higher interest rates. At the end of the day, the current economic environment usually matters to the value of your business, and it could either help increase or decrease the current valuation when going to sell. It mostly depends on your business’ resiliency to the cause of the current economic turbulence.
About Infinity Capital Partners
Infinity Capital Partners is an Oklahoma City-based middle-market investment bank offering a broad range of advisory services to private companies and financial sponsors across a variety of industries. Infinity works closely with owner-operators, shareholders, founders, and management teams of private companies to provide tailored services including M&A advisory, debt and equity placements, recapitalizations, and strategic advisory. For more information about Infinity Capital Partners, including a list of current projects, please visit our website at www.infinitycapitalpartners.com. Securities placed through Infinity Capital Securities, LLC. Member FINRA.
Chris Lee
Managing Partner
Infinity Capital Partners