Search funds in recession

December 15, 2022

by a searcher from INSEAD in France

Hello All,

Any insight on how to manage search during a recession? I am curious to whether this could be an opportunity to find good deals on te market and to what extend are investors patient in this environment,

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I certainly think there will be some good opportunities out there, especially as some aging owners who survived the Great Recession, and now the pandemic, do not want to go through another recession. However, you need to be sure the business you are buying has strong customers and has some resistance to a recession. You certainly do not want to overpay for a business right now or buy a business assuming sales are going to continue to grow at the same level they have the past two years in 2023 or###-###-#### For some businesses those sales might still grow, but others might see a setback in 2024.

With all of the business financials I look at every day, I can certainly tell you I am seeing a flattening of revenues and profits and in some cases a decline in revenues in the back half of 2022 from what we saw in 2021 and the first half of###-###-#### This is not across the board, but pretty much everything we saw in the back half of 2021 was showing growth over the first half of 2021, and that is not the case in the back half of 2022.

Reply by a searcher
from INSEAD in Atlanta, GA, USA

There will certainly be some good deals to be found with sellers willing to part with their businesses at relatively lower valuations, but as a searcher I would think about being more conservative about my expenditures to extend my runway. My sense is that in the GFC, similar to real estate, there was low market liquidity: sellers did not want to part with their businesses at depressed valuations (knowing what the business is worth in good times) and buyers were nervous about deploying capital and pulling the trigger. So, as a searcher this would suggest doing what you need to do to be able to continue searching past a recession ie taking lower draw if a traditional searcher.

Of course, there is opportunity in any market. So continue the tactical search as you would normally.

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