Mergers and acquisitions (M&A) have been a long-standing company strategy to grow, consolidate, or switch business models. Yet economic downturns come with new challenges that heavily influence deal valuations and deal structuring. Regardless of inflation, increasing interest rates, or uncertainty in the market, downturns change deal assessment, negotiation, and execution. Let’s see how economic downturns influence M&A deals and how buyers and sellers can cope with them.
ALSO READ: Green Bonds and Sustainable Capital: 5 Trends to Watch
1. Lower Valuations: A Buyer’s Market
During times of economic recession, company revenues fall, resulting in decreased profitability and lower valuation multiples. This change triggers a buyer’s market, as acquirors are able to negotiate favorable terms and acquire assets at lower prices. Sellers have to be realistic and look towards alternative valuation frameworks, like revenue-based earnouts, to sustain deal attractiveness.
2. Increased Deal Scrutiny & Due Diligence
During uncertain economic times, purchasing parties undertake stricter due diligence to evaluate financial solidity, cash flow strength, and possible risk. Sellers need to prepare ahead by having clean financials, displaying operational effectiveness, and clearing red flags that would jeopardize deals. Greater openness can build purchaser confidence and promote smoother deals.
3. Shift Towards Creative Financing Structures
With tighter credit markets and increasing borrowing costs, conventional debt-financed transactions become less viable. Deal-makers are turning to innovative financing structures, such as:
- Earnouts – Post-acquisition performance-based deferred payments
- Seller Financing – Sellers lending to buyers to facilitate the transaction
- Stock Swaps – Trading equity rather than cash to maintain liquidity
These structures bridge valuation gaps and reduce risk in a volatile economy.
4. Increase in Distressed M&A Deals
Economic downturns create financial hardship for distressed companies, thus driving the volume of distressed M&A transactions. Purchasers can purchase assets at discounted prices in bankruptcy sales, restructuring transactions, or opportunistic acquisitions. But such transactions involve close risk analysis, legal implications, and turnaround planning to guarantee long-term success.
5. Long-Term Strategic Considerations
While recessions are challenging, they also provide opportunities for well-funded businesses to pick up market share, diversify portfolios, and acquire strategic assets at attractive prices. Businesses with healthy cash reserves and a defined M&A strategy can come out of the recession stronger.
Conclusion
Economic downturns remake M&A environments, presenting both risks and opportunities. Through the evolution of valuation techniques, increased due diligence, and utilization of flexible transaction forms, companies are able to ride through volatile times and stimulate successful acquisitions. With changing markets, strategic M&A is a potent growth driver—when conducted with vision and flexibility.