Selling your business during economic uncertainty

Despite the difficult circumstances small- and medium-sized business owners have endured since the start of COVID, business valuations and M&A activity actually trended upwards in many sectors during 2020 and 2021. Now, Canadian business owners are facing a more sluggish economy in the post-COVID era.

As a business owner, you’re likely used to seeing business cycles, the booms and busts that impact your livelihood — but probably not cycles this dramatic. Succession planning is about being prepared to sell or exit your business on your terms, when the right opportunity arises. Even in the face of uncertainty, your succession plan can remain intact because you’ve prepared for multiple possibilities.

The possibility of a recession impacting your business is always real, and largely outside of your control. In that way, a recession is not unlike a surprise injury, long-term illness, unexpected purchase offer, or pandemic that impacts your business. Treating a recession like any other unpredictable life event can help you maintain perspective as you plan to sell your business.

Business valuations during a recession

Many business owners are, understandably, concerned about what will happen to the value of their business if a recession hits. The most common metric used to measure the value your business could receive in a sale is a combination of EBITDA and EBITDA multiples.

Your EBITDA is simply a metric for measuring your profitability. A recession, if it happens, is not guaranteed to make your EBITDA fall; in many cases it could hold steady or even rise. Your EBITDA is impacted by some external factors like your region and your industry, but many factors that move it up or down — the fundamentals of your business — are within your control.

EBITDA multiples, however, are solely determined by the market — i.e. what buyers are willing to pay. Generally speaking, EBITDA multiples do go down during recessions, because buyers look for ways to pay less, or are constrained in how much they can pay. The current interest rate environment may also play a role in multiples. While observing trends is helpful, every business sale plays out differently. You never know what your EBITDA multiple will be until you test the market.

As a business owner, it’s important to differentiate between the profitability and the value of your business. Whether in a recession or not, the best thing you can do to maximize your valuation is focus on the fundamentals that drive profitability. Multiples aside, there’s always a direct correlation between your EBITDA and your business valuation.

Although recessionary concerns may impact some businesses, there is still a significant amount of capital in the market with both strategic buyers and private equity groups, with investors expecting returns on capital. There continues to be a strong appetite for well-run businesses and fundamentals around supply and demand may influence the exact impact on valuation multiples.

Maintaining perspective

As the business owner, your priority should be to maintain perspective, and not let the numbers distract you from your succession goals. A depressed valuation during a recession does not mean you need to sell now, or that you’ll never get a pre-recession price in a sale.

Something to keep in mind: although many companies have seen lower valuations now than they did a year ago, many of those same companies enjoyed large gains in their EBITDA and multiples that have not yet fallen past pre-pandemic levels. Your business may still have a higher purchase price now than it did in 2019, for example.

Making rushed decisions can lead to seller’s regret later. Your succession plan should build your confidence and clarity as you decide whether to sell during a recession, or to wait for better times ahead.