Growth Opportunities Through M&A Are Possible, Even Amid Economic Uncertainty
In times of economic uncertainty, expanding your business through mergers and acquisitions (M&A) may seem like an unattainable goal; however, businesses shouldn’t let fear of the unknown push growth opportunities to the back burner. Companies with available or accessible capital can seize acquisition opportunities to obtain valuable assets, including buildings, equipment, products, and experienced staff. Through the acquisition of smaller, less adaptable companies that are struggling to maintain operations, these buyers may be able to achieve growth, development, or other strategic goals.
Company management and investment committees have a heightened awareness of risk in times of economic uncertainty, which may lead to resistance in justifying large capital expenditures. Mergers do not require cash, yet they may provide the influx of resources needed to maintain operations at the utmost level of efficiency and profitability. While they occur less often than acquisitions in general, mergers may be an attractive option in today’s economic climate. An amiable merger may promote the best possible outcome for parties otherwise struggling to stay afloat or simply meet hoping to meet their shared production and profitability goals.
Certain trends emerge during economic recessions that companies need to keep at the forefront of their M&A planning efforts. Consumers, investors, markets, and companies themselves are each experiencing shifts in their respective norms. Those shifts bring about significant considerations within every industry sector considering M&A. With the right strategy and business advisory team, however, successful mergers and acquisitions (M&A) are possible, even amid the COVID-19 crisis and its effects on the U.S. economy.
Accessing Capital & Managing Debt
M&A capital is more difficult to access in an economic downturn. We’re already seeing a tighter credit market. Financial institutions are keenly alert to the risk of downgrades and defaults on their existing loans, as well as the risk involved in attempting to accurately underwrite future loan performance. With corporate profits and bond prices down as well, lenders are certainly more hesitant.
In times of market volatility, the private lending market may offer alternative funding sources of interest. Private equity firms actively seek opportunities to capitalize in the non-publicly traded arena. In general, private loans are more costly than traditional bank lending, and business advisory services are recommended in assessing any proposed lending terms and conditions.
Evaluating Operations & Workforce
In times of economic uncertainty, businesses should revisit operations and procedures for missed opportunities to simplify and increase efficiency. Areas such as pricing or job costing, as well as supply chain and project management should be examined in an effort to maximize efficiency before evaluating how they best fit with additional operations and procedures brought in through M&A.
The same is true for staffing. Evaluate your own workforce for underperformers and overlap before acquiring additional employees. In evaluating your workforce, keep potential growth and employee morale at the forefront of your workforce planning efforts. Retaining key employees with valuable leadership knowledge and skills is always an asset for any company, especially in uncertain times. Sweeping cuts intended to offset declining revenue can actually work against you in the long-run. Low employee morale and declining trust in management ultimately lead to decreased employee engagement and productivity.
Maintaining Customer Confidence
Keep customer buying patterns and likely changes in their level of engagement in mind in M&A planning. If you focus too squarely on cutting your costs without considering the financial hardships faced by customers in a tough economy, you may find yourself losing customer confidence and, ultimately, losing both customers and revenue. Approach your M&A planning with an angle to retain your existing customers, to meet the needs of your expanded customer base, and to attract prospects.
Adjusting Due Diligence and Valuation Procedures
History tells us that new business models will emerge and have the potential to disrupt M&A, so it’s imperative that interested companies understand these potential disruptions as they evaluate businesses for their potential for merging or being acquired. Perhaps the company’s sales are being shifted to an online platform, new or existing products are focused or repurposed for use in healthcare, or maybe their product delivery methods have changed. Your company needs a solid understanding of your own business model’s evolution in terms of how it will integrate with that of another company. Will their level of innovation lead you forward, in-line with economic trends?
History also tells us that, in general, company valuations tend to be lower during periods of economic uncertainty. Since valuations are based on, among other things, forecasts, projections, benchmark data, and market comparisons, it’s an absolute necessity to call on industry-leading advisors to understand how certain adjustments to your process can improve your own business value, as well as where potential disparities may lie when assessing valuations of potential M&A candidates.
Contact Livingston & Haynes
My team at L&H specializes in serving entrepreneurial & emerging growth firms like yours. We are here to guide you through the intricacies of M&A in an uncertain economy. Contact me today to get started.
by Steven J. Haynes, MBA
Steven Haynes, MBA, is an administrative partner at Livingston & Haynes. Steve’s firm, Emerging Business Partners (EBPI), became an affiliate of L&H in 2007. Steve specializes in bookkeeping, payroll, and business advisory services, including tax, M&A, and funding and equity transactions, for technology, entrepreneurial, and emerging growth firms.