The Middle Market Review Insights on the Middle Market.

Subscribe Subscribe

Subscribe Today

I want to receive:

Thanks for subscribing!

Business Owners

An Owner’s Strategy for Increasing Value in a Down Economy


There is a saying that a rising tide lifts all boats. But the opposite is also true. As the skipper of a business, an owner needs to know when a tide will come in and when it will recede in order to plot a course to realize maximum business value. The economy’s cycles may not be as predictable as the moon’s gravitational force on our oceans but they nevertheless can have some predictability… if you know who to ask, what to look for, and what action to take.

The government’s descriptions of the economy’s cycles are inevitably after the fact and therefore useless to most business owners trying to plot a course for the future. Who wants to know that we are in a recession three or four months after it starts? At that point, business owners are interested in the recovery, when it will start, and how long it will last.

Most economists have their own set of statistical tea-leaves that they use to provide justification for their economic outlooks, for example, the price of oil, copper, foreign currency, inventories, employment rates, and stock market indexes and others can all play a role.

The record-setting start to this year’s stock market performance has led to a resurgence of predictions and considerable diversity on what to expect in 2016. Some experts predict that we are already in a recession and just waiting for the government to recognize it. Others say that we are just experiencing a market correction. Still others do not see enough evidence to support any changes and say it will take some kind of market shock to the ecosystem to trigger a down-turn this year.

To a business owner, this uncertainty can be unnerving, especially if a sale process is on the horizon. It begs the question: How can owners create a winning business strategy regardless of what happens in 2016?

Of course, the state of the economy has a great impact on M&A activity. A poor economy will result in decreased valuations and turn the current sellers’ market into a buyers’ market. The situation will cause most owners who might have been considering a sale transaction to pause and re-examine their objectives. But even economic uncertainty is not necessarily bad news for owners looking to engage in a sale transaction. It should however be a call to action.

Being able to predict the market’s direction is important to developing a winning strategy as a would-be seller. But that’s not all. Two additional components will also ensure a more favorable sale when markets recycle. And these components are under the owner’s control. First, develop a strategy to strengthen the likelihood of the company’s growth. Secondly, plan for the next phase of the your life as owner. Doing both can turn a down market situation into a highly productive and rewarding outcome.

Heads You Win, Tails You Don’t Lose

So how does a business owner improve the value of his/her business when sales and profits are also likely to be down? Of course an owner could protect margins by cutting cost costs and indexing the company’s history against government reported data such as GDP, proprietors’ income, and stock market indicators to show relative performance, all of which would be useful to any buyer.

However, the biggest benefit that can be realized in a down market is doing a thorough risk assessment on the company’s ability to sustain growth and implementing a strategy to enhance it. Factors like businesses processes, strength of the management team, succession planning, culture, marketing, etc. can all be barriers and risks to growth. A solid plan to address these factors takes time to develop and implement, but if done properly, an owner can achieve a significantly stronger company (regardless of the decision to sell or not) when the economy recovers. It’s a classic description of a “heads you win, tails you don’t lose” situation.

The second controllable area deals with the owner’s mindset, and is probably the most critical since it can be a very costly show-stopper in an eventual sale process. If an owner is not psychologically ready to complete a sale transaction, none of the other conditions really matter much at all. This is the reason why so many investment bankers put penalties in their engagements if a seller backs out of a deal for no business reason or otherwise sabotages the transaction. Such a decision leaves a bad taste in everyone’s mouth and will be hard to overcome in the future.

Properly aligning business risk and readiness of the owner with the economy represents the trifecta in sell-side M&A. This requires development of thoughtful goals, strategies, plans, coordination and implementation. Getting the controllable elements in sync with the market window takes more time and experience than most owners can provide.

Fortunately, there are advisors who can assemble the skills necessary, discuss all the options, and help the owner avoid uninformed decisions that are likely to have negative outcomes. Experienced transition advisors can predict and help the owner take advantage of economic cycles, de-risk the business, and properly prepare the owner for a fulfilling post transaction experience. By doing this, smart owners can use an economic downturn to strengthen the business, achieve a satisfying sale process, and put their life on cruise control toward a fulfilling destination.

Learn More About Joining Axial

Request Information

Subscribe to Middle Market Review

Subscribe to Middle Market Review

Subscribe Today

I want to receive:

Thanks for subscribing!