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.
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
Generational Wealth Advisors’ affiliates are all part of one corporate family, they work with one another and may work together to provide services to you. The sharing of your information among affiliates enables Generational Wealth Advisors to serve you more efficiently and makes it more convenient for you to do business with Generational Group. Generational Wealth Advisors is permitted by law to share information with its affiliates. All of our affiliates follow similar privacy policies.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.