An Owner’s Strategy for a Down Economy: Heads, You Win; Tails, You Don’t Lose

By Gary W. Ampulski, PhD
Managing Partner of MidwestGenesis

There is a saying that a rising tide lifts all boats. But the opposite is also true. As the skipper of a business, an owner needs to know when a tide comes in and when it recedes in order to plot a course to realize maximum business value. Just as there is a repeating nature to the tides, the economy also runs in cycles. Its ebb and flow may not be as predictable as the moon’s gravitational force on our oceans but they are nevertheless still cyclical and their periods can have some predictability… if you know who to ask, what to look for, and action to take.

The problem with the government’s descriptions of the economy is that they are “after the fact” and useless to most business owners trying to plot a course for the future. Who wants to know that we are in a recession three or four months after it starts? At that point, business owners are interested in the recovery, when it will start and how long it will last.

Most economists have their own set of statistical tea-leaves that they use to provide justification for their economic outlooks. The price of oil, copper, foreign currency, inventories, employment rates, and Stock Market indexes to name a few, all seem to be on somebody’s list. The record-setting start to this year’s stock market performance has led to a resurgence of predictions and considerable diversity on what to expect in 2016. Some experts predict that we are already in a recession and just waiting for the government to recognize it. Others say that we are just experiencing a “market correction.” Still others do not see enough evidence to support any changes and it will take some kind of market shock to the ecosystem to trigger a downturn this year. To a business owner, this kind of uncertainty can be unnerving, especially if a near-term sale process is on the horizon. It begs the question of how to create a winning business strategy regardless of what happens in 2016.

Of course, the state of the economy has a great impact on M&A activity. A poor economy will result in decreased valuations and turn the current sellers’ market into a buyers’ market. The situation will cause most owners who might have been considering a sale transaction to pause and re-examine their objectives. But even economic uncertainty is not necessarily bad news for owners looking to engage in a sale transaction. It is, however, “a call to action.”

Like the uncontrollable tides, the state of the M&A capital markets should influence the timing of a would-be seller, and being able to predict the market’s direction is important to developing a winning strategy. But that’s not all. An owner should be aware that two other components will also influence a more favorable sale when markets recycle. And these elements are under the owner’s control. One of these focuses on developing a strategy to strengthen the likelihood of business growth and the other is a plan for the next phase of the owner’s life. They both have specific goals and are critical factors that can turn a down market situation into a highly productive and rewarding outcome.

So how does a business owner improve the value of his/her business in a down economy when sales and profits are also likely to be down? Of course an owner could index the company’s history against government-reported data such as GDP, proprietor’s income, and Stock Market indicators to show relative performance, all of which would be useful to any buyer. However, the biggest benefit that can be realized in a down market is doing a thorough risk assessment on the company’s ability to sustain growth and implementing a strategy to enhance it. Factors like businesses processes, strength of the management team, succession planning, culture, marketing, etc. can all be barriers and risks to growth. A solid plan to address these factors takes time to develop and implement, but if done properly, an owner can achieve a significantly stronger company regardless of the decision to sell or not when the economy recovers.

The second controllable area deals with the owner’s mindset and is probably the most critical since it can be a very costly show-stopper in an eventual sale process. If an owner is not psychologically ready to complete a sale transaction, none of the other conditions really matter much at all. This is the reason why so many Investment Bankers put penalties in their engagements if a seller backs out of a deal for no business reason or somehow sabotages the transaction. The problem is that without a thoroughly vetted set of objectives and activities for what a seller is going to do immediately after completing a business transfer, chances are good that the owner will experience seller’s remorse, anxiety, uncertainty, and back out of a deal that contains significant investment of time and money leaving a bad taste in everyone’s mouth that will be hard to overcome for any potential sale process in the future.

Properly aligning business risk and readiness of the owner with the economy represents the trifecta in sell-side M&A. This requires development of thoughtful goals, strategies, plans, coordination, and implementation. Getting the controllable elements in sync with the market window takes more time and experience than most owners can provide. Fortunately, there are advisors who can assemble the skills necessary, discuss all the options and help the owner avoid uninformed decisions that are likely to have negative consequences. Experienced transition advisors can predict and help the owner take advantage of economic cycles, de-risk the business and properly prepare the owner for a fulfilling post-transaction experience. By doing this, smart owners can use an economic downturn to strengthen the business, even if there is a decision not to sell when the economy recovers. It’s really a heads you win, tails you don’t lose, strategy.

About the Author

Gary W. Ampulski is Managing Partner of Midwest Genesis, a boutique advisory services firm focused on Business Value Enhancement, Operational Due Diligence, and Transition Planning/Execution. He is a former CEO of two public companies and business owner with experience in start-ups, joint ventures, internal growth, corporate development, turn-a-rounds, workout and M&A transactions.

Over the last eight years, Ampulski has advised private equity groups, lenders, and middle market business owners on strategic planning, operating improvement and business value enhancement. He has created multiple investment theses and partnered with both private equity and buy-side investment banking advisors to connect investors with target acquisition opportunities through market assessment, platform, and add-on identification, business valuation, and due diligence support.

Mr. Ampulski holds a BS, MS, and Ph.D. in Physics from the University of Michigan. He has received certification credentials as a Mergers and Acquisition Advisor (CM&AA) from the Alliance of Mergers and Acquisition Advisors® and an Exit Planning Advisor (CEPA) from the Exit Planning Institute. He can be reached at (847) 573-9966 or email: [email protected]