A recession is a period of economic downturn that can have significant consequences for businesses of all sizes. Mergers and acquisitions (M&A) activity is often one of the first areas to be affected during a recession, as Buyers become more cautious about making large financial commitments and face challenges in financing new acquisitions. In this blog post, we will explore some of the ways in which a recession could impact M&A activity and deal flow.

Reduced M&A activity: During a recession, Buyers may be less likely to engage in M&A activity due to a lack of available financing, increased uncertainty about the future, cost volatility and a general decline in economic activity. This can lead to a decrease in the number of M&A deals being completed, as well as a decrease in the overall value of those deals.

Changes in deal structure: Buyers and Sellers may be more likely to pursue M&A deals that are structured differently during a recession. For example, Buyers may be more insistent on earnouts or deferred payments, or even deals that involve 100% roll-over equity consideration.  Sellers may be more likely to accept these structures that have less (or no) cash at closing, all of which can help to reduce the financial burden of a deal. Additionally, Buyers may be more inclined to pursue deals with target companies that are more focused on cost-cutting and operational efficiency, rather than growth and expansion.

Increased focus on due diligence: During a recession, Buyers may be more meticulous in their due diligence efforts, as they seek to mitigate the risk of completing a deal that may not generate the expected return on investment. This could lead to longer M&A processes, as Buyers and their affiliates take the time to thoroughly assess the financial health and potential of the target company.

Opportunities for M&A: Despite the challenges that a recession can bring, it can also create opportunities for M&A activity. Buyers that are financially stable or have cash to invest may see a recession as an opportunity to acquire struggling competitors or complementary businesses at a discounted price. Additionally, a recession may lead to a wave of distressed M&A deals, as companies seek to sell off non-core assets or divest themselves of businesses that are no longer viable.

In conclusion, a recession can have a significant impact on M&A activity, leading to reduced deal volume and changes in transaction structure. Companies may need to be more conscious of financial risk in their due diligence efforts and consider the potential impact of a recession on operations and growth. However, there may also be opportunities for M&A activity during a recession, particularly for financially stable companies looking to acquire struggling competitors or complementary businesses, potentially at a discounted price.

If you have questions on M&A prospects or otherwise need assistance with a potential acquisition, please contact Zack Andrews at (703) 284-7283 or zandrews@beankinney.com or Kathleen Kelley at (703) 284-7284 or kkelley@beankinney.com.

This article is for informational purposes only and does not contain or convey legal advice. Consult an attorney or legal professional. Any views or opinions expressed herein are those of the authors and are not necessarily the views of the firm or any client of the firm.