Recession coming?  What’s a seller to do?

Headline last week:  “Plastics M&A strong, but clouds on horizon for 2019”.  Our firm does a great deal with plastics companies, and naturally, we really notice those scary headlines.  I had captured several others of the past few months:

Forbes – 8/18 “The next recession coming in a year or two.”

Time – 10/18 “Experts forecast a US recession by 2020.”

CNN – 11/18 “We’re just two years away from the next recession.”

Fortune – 12/18 “This year’s crystal ball looks much darker than years past.”

Walt Disney – wisdom from the past “I’ve heard there’s going to be a recession. I’ve decided not to participate.”

Even though economic forecasts are never really precise – there is a fairly loud noise forecasting trouble to come.

If you are a private business owner contemplating sale in the next three or four years, is that a worry?  Absolutely!  It is a fact that a depressed economy causes hesitation about the future, and thus can impact pricing for potential sale of your business.  It is well worth considering a slightly stepped up pace.  It may be worth big money to move sooner, if you could reasonably make your move to sell now.  M&A markets remain excellent today, but there is likelihood for turndown when the economy slides.  When the economy is strong, buyers tend to be able to finance more, to allow more aggressive pricing.   Also, when the economy is strong, there are more buyers with ready money to enable them to CONSIDER purchases. Plus, because pricing is almost always based in large part upon a multiple of earnings, good times usually mean bigger prices.

If you have a business that you may wish to sell, and you simply CAN’T accelerate timing for that endeavor, focus on some of the things you can do to build and enhance value for the future.  Your simple awareness of likely trends, and your preparation by attention to certain operating details, can make you stronger, and much more ready for potential sale in the future.  If you have some time to prepare, here are just a few suggestions to batten down the hatches and build power:

1. Enhance the “core” area of your business. Use downturns to emphasize your “command” of your fundamental core area, and take advantage of competitors who are stumbling in the downturn. Capture more space in your area of core expertise.
2. Build niche growth areas – If you have niche areas of your operation, with future sales potential, focus on planning for growth of such niches. Capture financial data separately for that segment of your business, to enable you to analyze and document future potential for building value.
3. Replace retiring management – If you have employees nearing retirement age, be sure to spend some time focusing on their replacement to come. (Buyers always look toward the COMING 5-10 years to assess their probability for success, so strong people planning helps.)
4. Solidify non-competes – If your sales staff or other key management have historically signed non-compete agreements, do the “housekeeping” of making sure all such agreements are current, signed, and effective.
5. Make sure you get regularly audited or reviewed financial statements documenting history of the company. Clean GAAP financial statements comfort buyers.
6. Housekeep physical facilities – Get rid of unused equipment or inventories. Repair or scrap non-useable items to provide more space and cleaner appearance to facilities.
7. Protect cash – Keep a continuous eye open for speeding collection of AR (ie. if someone wants a discount, trade for their agreement to faster payment). If vendors seek price increases, use that to buy greater time for payments (a potential benefit to help make up for an unavoidable price increase).  Think of those things as you negotiate, and build in slower cash outflow anyplace possible.

 

If every seller of a company could have even six months to a year ahead of the selling process to focus on housekeeping and cash flow related matters to protect the business, and to boost exterior “image” of the operation, value would be enhanced.  The months or years just before a possible recession can be a great time to get your business prepared for continued prosperity in the event of “down” times to come.