Should You Sell Your Business During a Recession?

A looming recession can be scary and confusing – especially if you’re carrying the weight of a company on your shoulders. Should you power through? Or call it quits now? 

Before we dive into the details, here’s the answer: Yes, you can sell your business during a recession. But should you? That depends on how well your company is doing. Tomorrow is never certain, and selling now might be better than jeopardizing your valuation due to events out of your control. Not always, but sometimes.

Why Sell Your Business During a Recession

Is a recession a good time to sell a business? You might be surprised to hear that yes, selling during a recession can be a smart move. Below, I’ve outlined some reasons why.

1. Your Company Is Profitable And Growing

The best time to sell your business is when it’s profitable and growing. That stays true whether we’re in the throes of an economic downturn or not. Why? Because it’s the clearest sign that a buyer can earn a return on their investment (assuming your asking price is fair). 

And if your business is performing well despite the recession, you’ve proven it resilient to macroeconomic changes. Another checkmark against the buyer’s acquisition criteria.

But if you wait too long to sell, you risk your business declining, making it less valuable to buyers. You might decide to overtake any potential downturns in your industry and secure your acquisition before things go sideways (and your performance stutters or falls).

2. Selling Aligns With Your Personal Goals 

Recessions shouldn’t get in the way of your personal goals. If you’re feeling burnt out, want to retire early, or are ready to move on to a new venture, delaying your sale could backfire. You want the highest valuation, of course, but dream valuations always seem just around the corner and seldom are – especially in periods of uncertainty. 

And even more importantly, can you afford to wait until the market recovers? Consult with a financial or wealth advisor for expert guidance on how you can best achieve your business and financial goals. Understanding the outcome of different acquisition scenarios can help you decide when to sell and even what prices you should accept.

3. You Don’t Have Cash Reserves

Certain industries will suffer a recession worse than others. Think education and medicine versus luxury and non-necessities. If your business falls into the latter category, you might struggle with declining sales and profits because consumers have less disposable income to spend on non-essentials. That doesn’t mean your business is necessarily a bad investment, just that everyone is tightening their belts. 

As a result, you might not have the cash reserves to keep your business afloat during the recession. If cutting costs and reducing expenses doesn’t free up enough money, the best option can be to hand over your business to someone with the financial resources to keep it running until the economy picks up again. 

It’s better to sell your company and ensure its survival than let it die in the recession. In this case, you can still get a fair price for your business because the buyer will see its potential for growth in a recovered economy.  

4. Private Equity Still Has Money to Invest

Even if the broader economy is struggling, private equity firms may still have the financial resources to invest in companies with the potential for long-term growth. You’ve just got to prove you’re one of those safer bets. 

Sometimes, private equity firms see a recession as an opportunity to acquire distressed companies at a discount and turn them around for a profit once the economy improves. However, while this is a possibility, we don’t recommend selling a distressed business. If you’ve got a cash reserve or can raise the money to survive, you’re better off going that route than selling your company at a massive discount. 

The Challenges of Selling Your Business During a Recession 

Selling your business during an economic downturn comes with challenges. You’ll need to overcome these obstacles to get your business into shape and attract a buyer. 

Buyers are more careful where and how they invest during uncertain economic times. Lenders are less likely to provide financing due to increased risk, which makes it harder for buyers to secure the funds they need to buy your business. And when interest rates are high, buyers don’t have as much buying power because they get less bang for their buck. As a result, finding a buyer willing (and able) to pay a fair price for your business can be challenging.

Our latest Biannual Acquisition Multiples Report shows that startup asking price multiples have fallen slightly in the last six months. With so much global uncertainty (the ongoing war in Ukraine, rising costs and inflation, supply chain disruptions, and so on), investors are more price-sensitive. Buyers want a safe bet, which translates to investing in businesses that are lean, efficient, and growing sustainably. That’s where your focus should lie. 

How to Sell Your Business During a Recession 

During tough times, demand for products and services might fall because consumers are cutting back on their expenses. If your profitability isn’t high right now or your growth has slowed, use this downtime to resolve those issues. Create a detailed exit plan and turn your business into the type of company a buyer will be interested in during a recession. 

1. Focus on Recurring Revenue 

You might think raising revenue is an obvious way to boost your valuation, but you specifically need to focus on the sustainability of your revenue. During a recession, customers are likely to cut back on non-essential purchases, which can cause businesses that rely on one-time sales to struggle. Recurring revenue provides a more stable source of income – and is the kind that you (and the potential buyer) can count on month after month. 

But how do you get more recurring revenue flowing into your business? Think subscriptions, memberships, and contracts. 

  • Offer subscription services: Create subscriptions your customers can sign up for on a monthly basis. This could be anything from a monthly box of products to access to exclusive content. Not only is a subscription good for your business, but it also provides customers with a predictable monthly cost, which can be more appealing when they need to manage their budgets carefully. 
  • Offer incentives for long-term commitments: A subscriber is great as long as they don’t cancel after the first month. Incentivize customers to sign up for longer periods. Maybe offer a discount for a year-long subscription or a free month for signing up for six months. Everyone loves a good deal, especially when it’s time to tighten the purse strings.
  • Provide maintenance or support contracts: If your product or service benefits from regular maintenance, offer contracts that provide customers with additional and ongoing support. For example, if you sell technical equipment, these contracts can give customers peace of mind knowing that their machines will continue to run without mishaps, even during difficult economic times.
  • Offer tiered pricing: Offer different pricing tiers for your products or services with varying access or benefits. Instead of canceling their subscription, this encourages customers to stay on with a lower-priced plan if they can’t afford their current option anymore.
  • Bundle products and services: By bundling your products or services into a subscription package, it will be easier for customers to access everything they need from your business. It also creates a more predictable revenue stream for you.
  • Create a membership program: If your business lends itself to a community-based model, consider creating a membership program. Members can receive exclusive perks, such as discounts, early access to products, or access to exclusive content.

2. Cut Your Expenses 

Just as consumers are cutting down on their expenses during a recession, so should your business. A lean company minimizes waste, excess inventory, and unnecessary expenses. Cutting expenses will help you preserve cash flow, and a healthy balance sheet could result in more attractive acquisition offers later.

  • Reduce overheads: Examine your business expenses, including rent, utilities, and insurance. Are there ways to reduce usage to save money? Can you renegotiate contracts with suppliers to get a better deal? Can you move to a smaller office space? Or maybe get rid of your office altogether and ask everyone to work from home. 
  • Re-evaluate staffing levels: Labor, including employee wages, benefits, and payroll, can account for as much as 70 percent of total business costs. During a recession, you might need to re-evaluate staffing levels and make tough decisions about layoffs or furloughs.
  • Cut back on non-essential expenses: This could be anything from office snacks and travel expenses to tools and marketing activities that aren’t generating a good return on investment. For example, can you consolidate your tech stack to just the essentials? 
  • Minimize inventory: Excess inventory can be a significant drain on your cash flow, tying up capital that you could use elsewhere in your business. Reducing stock-outs and overstocks can lower your overall inventory costs by 10 percent. Reduce your inventory by identifying slow-moving products and finding ways to sell them off. For example, you could offer discounts on slow-moving products or bundle them with faster moving-products to encourage customers to buy them. 

3. Focus on Efficiency and Sustainable Growth

In the face of a recession, every dollar counts. Identify areas in your business where resources are being wasted and reallocate them to areas that will provide the most significant return on investment. Various strategies can make your business more efficient and recession-proof. 

  • Create repeatable processes: Develop and document repeatable processes for everything from onboarding new employees to customer support and financial reporting. These replicable systems and procedures will allow your company to scale easier.
  • Automate tasks: Once you’ve created repeatable processes, automate them. Automating repetitive tasks can save time and reduce the potential for errors, which means your business can operate more efficiently and with fewer resources.
  • Outsource non-core functions: Outsourcing non-core functions, like accounting or IT support, can free up time and resources for your business to focus on its core operations.
  • Embrace technology: Adopting new technologies can help you improve productivity and reduce costs. For example, using cloud-based software can allow employees to work remotely and remove the need for physical office space (I’m sure we’re all familiar with Zoom meetings by now).
  • Focus on employee training: Do your employees know how to do their jobs effectively? Proper training helps your employees understand how to perform tasks correctly, reducing the time it takes to complete tasks and the mistakes that would cause delays. 
  • Review and analyze performance: Regularly review and analyze your key sales, marketing, and financial metrics, such as conversion rate, customer lifetime value, website traffic, cost per acquisition, cash flow, profit margin, and so on. By keeping a pulse on this type of data, you can optimize operations and get a better return on investment.
  • Streamline your product or service offerings: Simplifying your product or service can help you reduce costs. Eliminate any product or service that isn’t profitable or doesn’t align with your overall business strategy. For example, with a SaaS company, you might eliminate a few reporting features that customers seldom use and focus on improving the task tracking and collaboration tools critical to your core value proposition.

4. Build Economic Resilience 

Economic resilience is how well your business adapts to changes in the economy. Can you anticipate risks, such as an upcoming recession, and take action to minimize them? The best way to do this is by creating a business resilience plan to overcome different economic scenarios. 

Not only does this make your business more resilient, but it also makes it more marketable during a recession. A buyer may look upon your business favorably knowing you’ve created a playbook for success under different economic conditions – good and bad. In other words, a plan to deal with a recession will instill confidence in the buyer and derisk the acquisition.

Ultimately, economic resilience is about being flexible and adaptable. The more you can adjust to changes in the economy, the better equipped your business will be to survive – and the more chance you have of someone buying it. Remember: It’s possible to sell your business, even during a recession, as long as you can justify why it’s a good investment for a buyer.

Ready to List Your Company for Sale During a Recession? 

Here are some things to keep in mind when it comes to setting expectations and instilling confidence in buyers: 

  1. Create the perfect listing: Identify what makes your business unique and valuable to potential buyers, even if it isn’t doing as well as before the recession. Add your economic resilience playbooks so the buyer knows how to tackle any challenges a recession brings. 
  2. Price your business realistically: During a recession, buyers will be looking for a fair deal. When determining your valuation, use different calculation methods, ask for advice within your community, or enlist the help of a valuation expert who’s familiar with selling during a recession. 
  3. Work with a reputable advisor: An M&A advisor with experience selling businesses during a recession can help you navigate the market and connect with potential buyers. Working with them can also give you more negotiation power.
  4. Be flexible: Consider different payment options and be open to creative solutions to help buyers overcome financial challenges. This could be in the way you structure the deal, such as seller financing where the buyer breaks up the total purchase price into smaller payments or earnouts where the buyer pays a portion of the price later based on your company’s future financial performance. Or prequalify your business with alternative financing partners so the buyer can obtain the capital to buy your business. 
  5. Keep your business running smoothly: Once you’ve decided to sell your company, keep hitting your targets. Buyers want to see your business grow and generate profit, so ensure you’re running everything like you’re not planning to leave. 
  6. Be patient: Selling a business during a recession can take longer than during a booming economy. Be patient and stay focused on your goals – it will happen! 

Everything we’ve discussed doesn’t just make your business more investable, it also makes it more resilient to change, which is exactly what you need to survive and thrive in a recession. If your business is booming and you’re contemplating whether to sell it now or in the future, listing on costs nothing, so why not give it a try? 

What Businesses Do Well in a Recession?

In a recession, people tend to become more cautious with their spending. Businesses that provide essentials like food, utilities, and healthcare are typically recession-proof. Also, businesses that offer affordable or discounted products and services often do well during a recession. People are looking to save money wherever they can, so if you can offer value without sacrificing quality, you are in a good position.

These types of businesses tend to do well during a recession:

  1. Discount retailers: During a recession, people often look for ways to stretch their budget and save money on everyday items. Discount retailers and dollar stores offer affordable options for necessities like food, household items, and clothing.
  2. Grocery stores: People need to eat regardless of the state of the economy, so grocery stores tend to be recession-proof. In fact, during a recession, people eat out less and cook more meals at home.
  3. Healthcare providers and medical facilities: Healthcare needs don’t disappear during a recession, and in some cases, people may need more medical attention due to stress-related illnesses or job loss.
  4. Repair and maintenance services: People may be more likely to repair broken items rather than replace them during a recession, so these types of services can do well.
  5. Debt collection and credit counseling services: Unfortunately, job loss and financial hardship can lead to debt and financial difficulties. Debt collection and credit counseling services may see increased demand during a recession.
  6. Online marketplaces and ecommerce sites: Online shopping has become increasingly popular in recent years, and during a recession, people may be more likely to shop online to find the best deals.
  7. Professional services: Businesses and individuals may need legal and accounting services more during a recession to navigate financial and legal challenges.

Is It Better to Sell Before a Recession?

If you know your business isn’t recession-proof, you might want to sell it before a recession hits. Why? Because your business might suffer if the economy worsens. Some industries like groceries and medical products can fare well – or even thrive – during a recession, as we saw during the height of the pandemic. Luxury and non-essential niches tend to struggle. 

If you fall into the latter category, you can expect your business to experience a decline in sales, profits, or both. If you’re a B2C company, consumers will have less disposable income to spend on non-essentials and, if you’re selling B2B, businesses will have a reduced budget to spend on products and services. 

In this scenario, it’s better to sell your business sooner rather than later, before its value declines. You can cash out your investment and avoid the potential losses that could come with a prolonged economic downturn, moving on to other opportunities better positioned to survive the coming storm.

What Happens to Businesses During Economic Downturns?

A recession can throw your business for a loop. By understanding the common effects of an economic downturn on businesses, you can better prepare yourself to survive and even thrive during tough times. 

  1. Decreased consumer spending: With less disposable income, consumers often cut back on non-essential spending, which can hurt businesses that sell goods and services in those industries.
  2. Reduced revenue: During tough times, companies may experience decreased demand for their products and services when consumers tighten their belts. As a result, businesses see a decline in revenue, making it difficult to cover operating costs and remain profitable.
  3. Increased competition: Competition can intensify during a recession as companies fight for a shrinking pool of customers and revenue.
  4. Supply chain disruptions: An economic downturn can disrupt global supply chains, causing shortages of raw materials and making it more difficult for businesses to produce their goods.
  5. Reduced access to credit: During a recession, it’s more difficult to obtain loans and credit. This makes it challenging for businesses to secure the necessary funding to grow – or stay afloat.
  6. Increased layoffs: As revenue declines, businesses may need to lay off workers to cut costs and remain financially viable. This can harm the economy as a whole, as fewer people have disposable income to spend on goods and services.
  7. Business closures: In the worst-case scenario, some businesses may be forced to close their doors permanently if they can’t recover from the financial storm.

The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.

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