Higher interest rates, recession, valuations

July 31, 2022

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Santa Clarita, CA, USA

How is everyone thinking about acquiring a small business given we are in a technical recession now and interest rates are expected to grow, The standard answer is buy recession proof or the multiples are low so should protect the investment, but how are investors thinking surviving this downturn, if any.

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Reply by a searcher
from Southern Methodist University in St. Louis, MO, USA

Don’t think you change the playbook much except be a little more cautious when searching and focus more on the downside scenarios.. Given the typical debt loads in ETA, you should be looking for recession resilient businesses anyways. SMBs also trade at such low multiples already so hard to mark multiples much lower. At this point short-term rates are just now back to a normal level and bond market is saying they are not likely to go much higher. Treasury curve is expecting around 3.5% CPI over the next year so consensus is the Fed will get things under control, though we’ll see in time. Plus given inversions in yield curve, bond market is saying rates will likely start actually getting cut again within the next year or so. Thus, wouldn’t be too concerned with rates going too much higher. Recession seems like it will be minor. Consumer sentiment is low given inflation, but consumer balance sheets and spending continue to remain strong. If anything a mild recession might help committed searches as some folks drop out of the market.

Reply by a searcher
from United States Naval Academy in Johnson City, TN, USA

Agree with the thoughts above. 1. Recession headlines could create more motivation in sellers looking to retire. 2. I'd be sure to pressure test any cashflow projections in the event on a recession as well as 3. thinking long and hard about all the ways this specific recession could impact your specific business. 4. If possible, conserve cash/ leverage to take advantage of opportunities the recession creates (secondary to putting that cash/ leverage to user buying the best business possible up front. )

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