Surfer riding a huge wave to represent buying a company before a recession

Buying a Company Before a Recession: What to Consider

by kirkcoburn
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So you’ve found a business that aligns with your vision, due diligence is humming along, and the existing team appears to vibe with your corporate culture—and then, boom. Everywhere you look, the talking heads are warning against some sort of recession tsunami that will have all of us scrounging for pork and beans any minute now. Forget the fact that unemployment is still stupid low and that the fundamentals of the economy aren’t too bad; just run around like the sky is falling, and hey, maybe it’s a self-fulfilling prophecy. Should you reconsider buying a company before a recession?

Maybe. But before you pull the plug on your acquisition, take a step back and excise the drama. Are you buying a business that could withstand a recession? Even better, is it a company that’s positioned to explode if there’s an economic pullback?

The fact that you’re reading this tells me that you’re not buying into the hospitality or luxury pet food industries. Instead, you’re investing in energy, probably renewables. So if your timing is right, buying a company before a recession might be the best thing that ever happened in your entrepreneurial career.

How Do I Know If We’re in a Recession?

First, let’s be clear about the difference between an honest-to-God recession and a downturn in the stock market. Repeat after me: the stock market is not the economy. At best, it’s a lagging indicator; by the time a given company shows negative earnings and starts laying people off, the damage is past done. Don’t confuse corrections in the market (see GameStop) with a recession, and please, turn off CNBC.

A recession happens when the economy stops growing and starts shrinking. Conventional wisdom, per the New York Times (and the National Bureau of Economic Research), is that a recession is “a significant decline in economic activity” that cuts across all sectors of the market and lasts at least several months. The harbingers of a recession are things like falling GDP, declining wages and employment, and reduced industrial production and retail sales—it’s the whole enchilada, not just rising gas prices. The last “recession” we had in the US was in 2020, and that was a mini-slowdown that really only lasted a couple of months and had nothing to do with the actual economy.

The Great Recession of 2008—well, that was a real one. I’m not going into the minutiae of how and why it happened, but GDP fell about 5%, and it dragged on for over a year.

Recession Breeds Opportunity

A recession is a petri dish for opportunity. Here’s a fun fact about buying a company before a recession: IBM, Microsoft, and HP all launched during an economic downturn. Yeah, I get that energy is my hotspot, and these companies aren’t exactly in the renewable space. But here’s my point: these companies offered a new way to do things that were so innovative businesses were willing to take a chance on wild ideas like software and automated business machines.

A recession presents an opportunity for your better mousetrap (or battery technology, solar panels, whatever) to gain market share. The idea of a global energy shortage isn’t new, and as we collectively freak out over $5 gas (and good luck finding an EV these days), let’s look at the bright side. Renewables are picking up traction in the global markets. Germany is committed to dropping around $3.7 billion in green hydrogen partnerships to speed up its transition to renewables.

Here in the US, Bank of America—not exactly famous for having a cutting-edge green mentality—has a 15-year contract with Constellation Energy to eventually switch its global power use to 17% solar energy.

The silver lining in buying a company before a recession or slowdown is that it lets you accelerate the changes that would take months in the boom times. When you’ve just bought the company and the economy tanks, you get to blow up the existing business model and culture under the guise of meeting drastic circumstances. Make that a win.

Why Buy on the Brink of Economic Disaster?

That’s a little aggressive, I admit, because the underlying components of the US economy are just too strong to go completely sideways. Even if it lists a little, your customers need innovative ideas to stay afloat themselves. If you’ve already identified a company and are well into the process, keep going. On the other hand, if you’re still looking for the right opportunity, there are a lot more founders willing to sell in a downturn than in the good times. Your options for a purchase grow when the economy slows down.

If you’re willing to bail out a founder who’s struggling already, you get a lot more leverage if the economy appears to be tanking during the negotiations. You’ve already established that the fundamentals of the business are good, so why let a little thing like a recession get in the way of a great idea?

Also, there’s a built-in customer base that’s probably more open to new products, an existing infrastructure and workforce, and great plans for the company. You’ve also got cash flow and investors, so go ahead and execute.

Your Capital Goes Further

The old adage “buy low, sell high” works pretty well if you’re buying a company before a recession. During uncertain economic times, lots of buyers dip out of the hunt. This means you have less competition for the business (if you’re the only one interested, rethink why that is) and more negotiating power. If unemployment is growing, then you can hire your labor force for less and dictate your own terms; many entrepreneurs think it is high time they can be in charge again.

Everything, honestly, is cheaper in a recession—take advantage of it.

OK, Maybe Not Everything

Well, that’s not entirely true—money costs more. The silver lining here is that when money gets expensive, the markets tend to drop. I’m not here to discuss economic policy. But here’s the short version: rising interest rates and tanking stock prices equals lots of cash floating around. Entrepreneurs should be sniffing out that cash like truffle-hunting pigs. The VCs have baited the woods—they’re looking for exciting investment opportunities.

There’s a Bigger Talent Pool When Buying a Company Before a Recession

When large companies decide that the talking heads are correct and recession is lurking in the next quarter or two, their knee-jerk response is to lay off their labor. This move is about saving money. So they often make the brilliant call to get rid of the highest-paid people; these are the ones with all the experience and institutional knowledge. They’re also apt to get rid of the creative thinkers and innovators; corporate America does not universally admire folks who buck the status quo—especially during economic downturns.

Here’s your chance to grab talent that you’d never be able to attract in a strong economic environment. Laid-off corporate types may be sitting on a decent severance package and jonesing for the thrill of being part of a new venture without a big salary (so negotiate for less cash and more options). Don’t discount any people who’ve worked for suppliers or your competition, either. They know stuff.

Do Your Due Diligence Like Your Financial Life Depends on It

Surfing small, turbulent waves successfully

Because your financial life, and your reputation as an entrepreneur (which draws a straight line to your ability to attract financing and investors), depends on the depth and accuracy of your due diligence, leave nothing unturned or ignored. I’ve talked a lot in this series about due diligence. But I can’t stress enough how critical it is for you to get it exactly right if you think you’re facing an economic cliff.

Assessing market trends is a given. Dig deeper to make sure that you have the agility to pivot to meet changing trends. If you’re about as nimble as the Titanic, well, you know what happened there. The fact that you’re bold enough to consider making this acquisition in a fuzzy economy tells me that you’re not likely to get hidebound, but it bears saying anyway.

Be Prepared When Buying a Company Before a Recession

I’m not advocating going company shopping during a recession. Nor do I think buying a business within a shaky economy is necessarily the best idea you could ever have. I am saying that if you’re prepared for all possible scenarios, you can weather whatever comes your way. Obviously, this is why due diligence with a fine-tooth-comb  is so crucial.

Here’s the hard reality of buying a company before a recession or right at the start of one. You still might be paying too much for the company. That your customers could go under is a risk of doing business, but what about your vendors? Have you done as much due diligence into your supply chain as possible? Do you have backup suppliers? If there’s one thing we’ve all learned over the past couple of years, it’s that you’re only as good as the weakest link in your supply chain.

Recessions suck. There’s not enough lipstick in the world to pretty up that pig, truffle sniffing and all. But if you’ve identified a company you believe is the one you’ll regret letting go of, move ahead with the transaction. Recessions also end, and there’s no way to forecast when that’s going to happen. The last thing you want is to table the deal if, six months later, the economy is steaming along—and some gutsier entrepreneur has bought your company. That, my friends, is regret.

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