Timing the Market: Economic Recessions and Succession Planning
Beginning in December 2007, the U.S. entered what is arguably the worst economic climate since the Great Depression. The collapse of the U.S. housing market and subsequent stock market crash in September 2008 resulted in a massive loss of wealth. From late-2007 to mid-2009, consumer spending and business fixed investment fell sharply while nearly 8.7 million Americans lost their jobs.1 Many businesses struggled to stay afloat in the years that followed the recession as the credit crunch made it difficult for companies to access financing for working capital. By the time the recession ended in 2009, it had contributed to the closure of more than 235,000 businesses.2 One effect of the recession that is often overlooked is the impact it had on the succession plans of business owners.
In early 2007, nearly 40 percent of business owners were over the age of 55 and 12.5 percent were 65 years or older.3 At the time, many business owners had enjoyed several consecutive years of growth for the first time since rebounding from the 2001 recession and planned to retire in the near future. Unfortunately, no one could have predicted the severity of the impending recession and the slow recovery that followed. Many business owners who planned to sell their companies and use the sale proceeds for retirement saw the value of their companies decline significantly when the recession hit. While some owners eventually closed their businesses, others stayed resilient and are still running their companies today. While there’s no way to know exactly how many business owners postponed their retirement plans due to the recession, a large number of owners probably wish they would have exited their companies before it began. Business owners who are approaching retirement today may soon be faced with the same challenge.
Is Another Recession Looming?
According to Bill Greiner, Chief Economist for Mariner Wealth Advisors, a potential recession is on the horizon. In his December 2017 commentary, Greiner asserts that the U.S. business cycle is maturing. A business cycle describes natural fluctuations in the output of goods and services in the economy and can be broken down into four distinct stages:
Bringing More Buyers to the Table
One reason why many buyers make unsolicited acquisition offers is because they are searching for exclusive opportunities in which there is no competition from other interested parties. Without competition, buyers don’t have as much incentive to put up their best offer and have more negotiating leverage, knowing the seller doesn’t have a fallback option on the table. As a result, sellers who enter into negotiations with a single buyer often leave money on the table and are more likely to agree to less favorable terms.
- Peak – maximum production output, full employment
- Contraction – declining gross domestic product (GDP) growth and a rising unemployment rate
- Trough – the point when an economy transitions from contraction to expansion, often marked by negative GDP growth and a high unemployment rate
- Expansion – increasing employment, GDP growth
When a business cycle reaches maturity, it means that the economy is reaching a peak. The peak of the business cycle typically represents the beginning of a contraction, which is followed by a recession. Greiner points to a variety of factors to support his belief that the U.S. economy is maturing and nearing its peak, including:
- The U.S. jobs market has matured, which may contribute to rising wages, and therefore inflation
- Strong consumer confidence and rising consumer discretionary spending
- Increasing non-residential fixed investment
- Restrictive monetary policy
- Flattening of the U.S. Treasury yield curve
- Recent stock market activity matches historical patterns leading up to past recessions
According to the National Bureau of Economic Research, 11 business cycles have occurred since 1945 and the average expansion lasted 58.4 months.4 The current expansion, which began in June 2009, is tied for the second longest during that span at 106 months, behind only the 120-month expansion that preceded the 2001 recession.5 So by historical standards, the current business cycle has become aged. However, certain indicators used to help forecast recessions, such as the gap between long-term and short-term interest rates and credit spreads between junk and high-yield bonds, don’t seem to indicate an imminent recession.
While Greiner does not expect a recession in 2018, he says it’s reasonable to expect that one may occur in the next one or two years. Meanwhile, continued expansion is expected, along with increased stock market volatility due to political uncertainty stemming from the upcoming midterm elections, the potential impact of the Trump administration’s steel and aluminum tariffs, and the Federal Reserve’s decision to raise interest rates throughout the year.
What Can You Do to Prepare?
One of the biggest mistakes that business owners make is waiting too long to think about succession planning. Rather than being proactive in planning for the future, many business owners don’t start thinking seriously about exiting their companies until something bad occurs or when they think something bad might happen. It’s easy to understand why—running a company can be mentally and emotionally draining when things aren’t going well, so you start looking for a way out. On the other hand, running a company can be exciting and rewarding when business is good, which makes it harder to walk away. But as many business owners learned during the last recession, this way of thinking can put both your financial future and the legacy you’ve built with your business in jeopardy. It may be time to start planning now if a recession is nearing.
Business owners who are nearing retirement age should approach succession planning with more urgency, especially if they have been putting off their retirement for fear of leaving money on the table by walking away while business is booming. When the economy enters a recession, M&A activity typically declines6 due to the impact it has on companies’ financial performance, the availability of capital and buyer confidence. Waiting to sell until the economy starts to falter will undoubtedly make the process much more difficult or require a long delay in the sale process.
The best way to commence the sale process is to obtain a business valuation so you know how much your company is worth. Even if the value of your company is not where you want it to be, it will help you understand ways to improve the value by providing insight as to what drives your company’s value and what areas need improvement. The next step would be to consult with your advisors, including your attorney, accountant and financial advisor to discuss your intentions to sell and potential contingencies. You should also consider engaging an M&A advisor to help you manage the sale process. M&A advisors provide value by using their expertise to generate a competitive sale process between multiple parties, which is the key to selling a business for maximum value.
When it comes to succession planning, timing may be the most important factor. History has shown that recessions are inevitable, and although they vary in duration and severity, they can have a negative long-term impact on your financial future. As many business owners learned prior to the last recession, success doesn’t last forever and things can change quickly. There is time to plan now and it’s best to get started before it’s too late.
1 Bureau of Labor Statistics. Employment Loss and the 2007-2009 Recession: An Overview. April 2011.
2 Bureau of Labor Statistics. BLS Spotlight on Statistics: The Recession of 2007-2009. February 2012.
3 U.S. Census Bureau. 2007 Survey of Business Owners.
4 National Bureau of Economic Research.
6 Institute for Mergers, Acquisitions and Alliances. M&A in the United States.
This document is for informational use only and may be outdated and/or no longer applicable. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Capital Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.