The Broker Blog

Bad Economy in 2008?

Published 13 Feb 2008 by Greg Price

Will we see a down economy in 2008? Is a recession looming? Stagflation? Deflation? If you listen to the talking heads and pundits, it would appear something not so good may occur during 2008. Leading economic indicators portend this as well. In addition, forecasts for the mergers and acquisitions markets all indicate a reduction in activity during 2008.

So does that mean now is a bad time to sell your business? Not necessarily.

If we look back at 2002, the last time the economy was really in the doldrums, deals did occur. In fact, 7,411 strategic mergers or acquisitions were completed according to mergerstat.com. These were not just headline grabbing mega deals. Approximately 67% of those deals had values of less than $100 million and nearly 15% of those were between $5 and $10 million. There were also deals between $1 and $5 million.

Note these deals are described as strategic. This means the purchaser wanted/needed to grow and the condition of the economy had no real bearing on completing a deal. The key was how the merger or acquisition would support the growth goal.

If the economy acts as many predict, this will still be a solid source of buyers. Buyers which typically do not need financing to complete a deal. When they do, it will likely be provided via a private placement. A real plus as the current “credit crunch” limits or restricts access to financing alternatives from traditional sources.
What does a strategic acquirer look for in a company? That depends. Sorry for the consultant’s answer but it’s true. Each potential acquirer has unique strengths and weaknesses. As a result, each will usually be seeking solutions to address those weaknesses and/or enhance strengths.

While the above is a bit vague by default, we do see some common themes when working with this type of buyer. Here are some of the more important:

• Payback Period. This is the amount of time an acquirer expects it will take for an acquisition to pay for itself. Most companies will use a 3,4, or 5 year payback period model.


• Synergy. The target acquisition, when combined with the acquirer, will yield a new company greater than the sum of the parts. In other words, it will address weaknesses and/or enhance strengths yielding a stronger, more effective new company.


• Integration. No matter how much it appears an acquisition will fulfill desired synergies, if people, places, and processes can’t be seamlessly integrated into the acquirer then it will be doomed to failure.


• Efficiency. This offers the ability to leverage resources helping to improve profitability via cost reductions and better productivity.


• Earn Out. This is really a risk mitigation strategy used by the acquirer. The acquirer will set a base price and then offer an upside incentive if certain goals are reached. Potentially, the additional upside, if achieved, can lead to a final price that provides a premium. If the business has more risk than the acquirer wants to take on, they might add a downside provision that reduces the payout if certain goals are not achieved.


• Transition. A strategic acquirer wants a seller who will commit whatever period of time is needed to insure continuity. Typically, this is at least a year and often longer. Some prefer only sellers willing to stay with the new company indefinitely.
  In addition, first impressions are vital. Strategic acquirers are well known for quickly making a decision based on first contact. You can chalk it up to so many companies, so little time. If the value is not readily apparent and/or if a seller is perceived as potentially greedy and/or uncooperative, they will move on to another opportunity. They may feign interest to be sure but our experience says they will not usually change their initial opinion. You must be prepared when approaching a strategic acquirer.

A bad economy does not mean it’s a bad time to sell your business...you just need to know where to look and how to present yourself and your company.