Recession Risk: Is Now the Right Time to Sell Your Business? - NEO Business Advisors

The risk of recession makes any business owner worry about their financial future. Depending on your current market conditions, you may feel more vulnerable to recession risk than others.
High inflation and unstable currency fluctuations make these fears feel closer to home. You may consider selling your business to avoid disaster, but don’t commit too quickly.

What Are the Main Effects of a Recession on Businesses?

Recessions are significant, widespread, and sustained contractions in economic activity. Economists typically observe this phenomenon during a decline in Gross Domestic Product (GDP).

When recessions hit, investors are less likely to put their money into specific industries and businesses. Unfortunately, this could result in a decline in your financial growth and business activity.

The United States usually experiences a recession after a volatile economic cycle. International conflicts, stock markets, and social climates all determine recession risks. Job losses are also common during these periods.

Does every business experience the same struggle?

Industry plays an essential factor in which businesses will survive a recession.

If your business produces essential commodities, it is less likely to feel a negative impact of economic decline than discretionary businesses (like entertainment or leisure). Manufacturing is generally a safe and stable investment during a recession.

Still, a significant decline may discourage you from investing in aspects of your business. This strategy may require you to make layoffs, contributing to higher unemployment rates.

Or are some businesses better equipped to survive a recession?

Some companies utilize effective recession risk management strategies when stocks begin to fall. Diversification is one method to mitigate recession risk. However, this effort often requires a strong cash flow and willing investors to support it.

Your small business may not have the practical financial situation to sustain these ventures. However, the size of your establishment does not necessarily determine its ability to survive. Large chains with several brick-and-mortar locations may struggle with rising costs and overheads cutting into profit.

Observations During the Last Few Economic Dips

Some services are still safe investments during recessions. During the COVID-19 pandemic, we observed state and federal governments designating essential businesses. Many of these companies managed to stay afloat and become stronger due to market changes.

Services that sat on larger cash reserves and technology advantages before the economic downturn generally maintained positive overall market value.

Most recessions offer you an opportunity to refinance your operations so you can reorganize your resources. Adapting during an economic slump gives customers the confidence to invest in your future performance.

What Happens to Lower-Middle-Market M&A During a Recession?

Buyer and seller activity facilitates a stable lower-middle market M&A during recessions. Still, conservative buyers may not engage out of fear that recession risk will depress the value of businesses.

Your business can take advantage of a recession to diversify its customer base or even buy up competitors. Recessions offer an investment opportunity that may facilitate your business growth.

Should You Sell Your Business During a Recession?

If your situation feels grim after reading this information, it may be time to consider selling your assets. Data suggests that most small companies do not have the business revenue to withstand a recession. Further, taking out business loans with high-interest rates may not be the best choice for your personal finance.

If you aren’t confident in the state of these financial markets, reach out to an experienced, reliable business broker to guide you.

Benefits of Selling a Small Business Before or During a Recession

Certain financial conditions may encourage you to sell a business before recession strikes. Proactively selling may earn you the most back on your investments.

Sellers will have more bargaining power when the economy is good, especially when their stocks are high.

Committing to selling before a recession is challenging if your business is experiencing growth. Unfortunately, your current income may not be enough to get you through the end of the economic dip.

Reasons Not to Sell When Nearing a Recession

Stocks rebound for many industries as the economy recovers. Suppose you have the revenue to sustain your services during a recession. In that case, you may experience a high reward at the end of the business cycle.

Adapting to customers’ demands during recessions can improve your value in the market and attract investors. Many businesses that expanded their delivery services during the COVID-19 pandemic saw significant growth in sales. Even as the economy struggles, you can still come out ahead.

Economic upswings also encourage customers to return to services they could not afford during the recession. Investing in a quality business-to-customer marketing service will help you achieve business growth.

How Do You Market a Business During Economic Downturns?

Rising inflation and a high unemployment rate make it hard to sell most things during recessions. Buying a company is an even riskier investment for some.

You need a powerful marketing strategy to get the most for your business. Consider working with a broker to develop a buyer persona for individual buyers, strategic buyers, and investment buyers.

This strategy must highlight why your business is a safe investment during a poor economic climate. Be convincing about how these services achieve long-term growth.

Asset Allocation | Leveraging Cash to Sell a Business During or Before a Recession

If you can increase the cash flow of your business, you will likely see an increase in the valuation as well. Managing a capital expenditure plan is the first step in this process. This may mean stretching payment terms on your payables by assessing the state of your accounts.

If stocks start falling, federal rates may also drop. This opportunity may allow you to refinance business loans with higher interest rates to better manage cash flow, and renegotiate employee benefits, HR, and other outsourced functions.

Don’t Make Your Decision Alone

It’s not easy to navigate a business sale with an approaching recession on your own. If you’re considering selling your business, NEO Business Advisors is here to help. At NEO Business Advisors, we have our pulse on the market. Because of our relationships with accountants, attorneys, and lenders, we can see the broader picture of what’s happening in the market across industries, competitors, customers, and the supply chain. Now, more than ever, we’re here to use that knowledge and experience to help our clients navigate the challenges and obstacles of acquisition in the ever-changing and highly competitive market landscape. Contact us today so we can put our expertise to work for you.