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Three reasons to buy a business during a downturn

surfing wave

Companies or individuals buying a business for sale typically hold off during a recession.

M&A Intermediaries and Business Brokers I know constantly say things like "I don't know where the bottom is in that industry" or "I want to wait and see the financial results of the next quarter" when talking to buyers during down cycles.

Two studies I have seen clearly show that M&A in a downturn is significantly more beneficial than buying a company during a boom period. One study was done by McKinsey & Company and the other by Ewing Kauffman Foundation.

Both studies attempt to answer the question of whether or not a recession, or economic downtime, is the best time to buy a business for sale.

These studies, and others, conclude that a recession is the best time to buy a business for sale, based on the value added by the acquisition after the downturn is over. This is due to three reasons:

1. Your competition is constrained, or eliminated. No better time to attack the enemy than when they are weak. They will not have the energy or resources to fight back. You can attack new markets without overpaying for that marketshare.

2. Customers are looking for a new source. Recessions and downturns in the economy force all people and entities to rethink the way they are spending, and possibly remodel their businesses. This means looking at their current vendors to make certain they are providing the maximum value. It is a great time to reenergize your acquisition, and develop selling synergies.

3. Employee Retention. The "brain drain" that typically takes place after an acquisition will not. Most employees will not risk jumping ship in a down cycle, and instead will give the new acquirer time to prove themselves. In addition, any new positions can be quickly filled with top talent.

When the recession cycle ends, the business owner is able to ride the entire wave on the upside of the cycle, as opposed to only catching the wave halfway up, or at the top, thereby missing the tremendous growth curve.

My experience has shown that the best time to start up a company is during a recession. I would be interested in hearing what you think.


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