How to approach M&A during an economic slowdown?
With so much uncertainty on the economic horizon, many businesses in the language services industry may be reassessing their M&A activity in 2023 and beyond.
Uncertainty has a heavy weight on decision-making, and buying or selling obviously is a big decision.
That means buyers and sellers are now taking the time to really zoom into what is the right decision for them.
For buyers, the keyword here is “scrutiny”.
This means buyers are going to have to dig deeper into whether what they are looking at is fitting into their acquisition rationale. Is now the right time for M&A? Do I wait? How do I do it? What do I focus on?
Likewise, due diligence is going to be even more important in understanding where and when the revenue will come from in order to adjust valuations.
Some buyers may want to consider joint ventures as opposed to an acquisition.
This removes the pressure of having to absolutely find all the cost synergies and it gives a good grounds for experimentation.
For those still looking for an acquisition, the priority is to find the right deals and get them done in the right way.
And as such, many buyers are going to be on the lookout for targets that are not asking for an astronomical price, but represent a good deal that they can move on quickly.
This means we are going to see multiple buyers competing for the same raw diamonds.
And while this normally happens, right now it’s going to be all the more important to make sure that whatever acquisition is made has room for profitable growth, not just revenue line, but the bottom line.
If buyers do advance to the LOI stage, they will want to close the deal quickly in case the economic circumstances change again.
And that means that the cultural fit and the technology fit will be even more important, but this time it’s going to go through even more scrutiny, because if you get the cultural fit or the need for technology investment wrong, it can cost you more and it will impact the performance of the company.
The current economic climate may also create more opportunity for private equity because some of the tech companies that might have gone IPO, or they were very optimistic about going IPO next year, might have to consider investors and low evaluations.
For sellers, if you are in a hurry to exit you need to be prepared to be flexible with the price and the deal structure, because if you’re in a hurry, that will go against the higher end of the valuation.
If you’re not in a hurry and you want to continue, you need to work on your resilience plan, mitigate all the risks and make sure that your business is safe.
And even if you go into that self-preservation mode, don’t put your growth strategy on hold indefinitely because it gives you an opportunity to rethink or reorganise in order to gain competitive advantage.
And if you are thinking of an exit and you’re in a good position and you’re a raw diamond that is coveted by buyers, you should expect that higher level of scrutiny we have just discussed.
For example, if your balance sheet doesn’t look good, work to make it right or you will never get the valuation you want. The debt-to-equity ratio also needs to look good, which is always applicable, but now even more so.
And work with the buyer on the cost synergies in a realistic way and try to close as quickly as possible because circumstances may change.
Finally, some advice for everybody – whether you are buying, selling or merging – you need to be very responsible and deliberate with how you choose to spend money and make sure that your teams and your advisors are not making you derail from that.
If you want to know more about this area, visit Lion People Global’s website where you can watch back our M&A Talks series of videos and fill out a questionnaire that entitles you to one hour’s free consultation on getting a LSP or language tech business ready for sale.