Investment bankers are frequently asked if an economic downturn will lower the value of a company. The answers have to do with the current performance and future prospects of your company, and with the state of the market.

Stuart Rose, partner, Stuart Rose, partner, Mirus Capital Advisors

Stuart Rose, partner, Mirus Capital Advisors

Life is all about timing. Selling a company for the highest value is also about timing. There are two time cycles one needs to be aware of:

  • Where your company sits on its growth curve
  • Where the economy is in the economic cycle

Another article discussed the first factor. Let’s explore second—market timing—in this piece.

Investment bankers get asked: “Is now a good time to sell my company?”  Or: “Will a downturn lower the value of my company?”  There is a lot packed into those questions. The answers have to do with the current and future performance of your specific company and with the “market”.  Let’s discuss the market.

To the extent that a recession slows a particular company’s growth, then the multiple for that company will fall.

Two questions:

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  • Will multiples grow or decline in the future given a growing economy?
  • Will the multiples shrink if a recession occurs?

Here are my answers for these two questions:

First, market multiples will not continue to grow.

Why?

  1. Because interest rates will continue to increase and the dangers of excess leverage is a lesson that will be learned again. Multiples are in part determined by how much leverage a buyer can put on the target.  We are already at levels of leverage which require steady growth to support the leverage.  Hiccups happen and there will be defaults.  Lessons will be learned and leverage will decline.
  2. Furthermore despite the respite in raising interest rates, they will likely increase over time. This necessitates higher discount rates in Net Present Value calculations.  Lower prices will be required to meet the necessary rates of return desired by buyers.

Second, Multiples will shrink if a recession hits because individual company’s growth prospects will diminish.

Growth is one of the three key determinants of a specific company’s ultimate EBITDA [earnings before interest, taxes, depreciation and amortization] multiple.  To the extent that a recession slows a particular company’s growth, then the multiple for that company will fall.  It’s not the recession that is lowering the multiple; it is the recession’s effect on the company.

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So if your company is very cyclical, you may wish to sell now before a recession hits—that is if you can convince a buyer the recession won’t hurt too much.  Otherwise, you may need to wait several years until after the likely storm has passed

Life is about timing.  There are things you can control and things you can’t.  Worry and work on the stuff you can control.  However, understands the stuff you can’t control might determine the ultimate answer.

Mirus Capital Advisors is an investment bank.

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