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Recessions Impact Ownership Transition

Recessions can have a major impact on your ownership transition plan if you haven’t properly assessed the effect of an economic downturn on your business. You can take steps to prepare for changes in the economy to insulate your plans from the worst effects of a recession.

“For whom the gods would destroy, they first grant 40 years of business success.” Peter Drucker

The 2008 Recession

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]

By the time the recession ended in 2009, it had contributed to the closure of more than 235,000 businesses.[2] I started Aspen Grove Investments in 2008 and can attest to how tough the recession (in addition to the impact of the 500-year flood in Cedar Rapids in June 2008) was to survive.

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 that time, many business owners had experienced several good years and were actively planning for a retirement, supported by the rising value of their businesses. When the recession hit, the value of their businesses dropped dramatically as lending dried up, buyers pulled back and uncertainty skyrocketed.

By 2012, 41 percent of business owners were over 55 and 15.6 were 65 years or older.[4] It’s my opinion that the increase, particularly in owners over 65, is directly related to the impact of the 2008 recession. Many older owners who managed to survive continue to attempt to recover losses in business value that they depended on for their retirement funds. It’s a bit like a poker player that makes more and larger bets to try to recoup losses from an earlier lost gamble.

Members of Generation X, born between 1965 and 1980, are the only age group to recover all money lost in the financial crisis. Median net worth has declined among baby boomers and people born between 1928 and 1945.[5]

The Business Cycle

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:

  1. Peak – maximum production output, full employment
  2. Contraction – declining gross domestic product (GDP) growth and a rising unemployment rate
  3. Trough – the point when an economy transitions from contraction to expansion, often marked by negative GDP growth and a high unemployment rate
  4. Expansion – increasing employment, GDP growth

According to the National Bureau of Economic Research, 11 business cycles have occurred since 1945 and the average expansion lasted 58.4 months. 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. [6]

Where do you think we are in the business cycle? There are many factors to support belief that the U.S. economy is maturing and nearing its peak, including:

– source: St. Louis Fed

What to Do

When the economy enters a recession, M&A activity typically declines due to the impact it has on companies’ financial performance, the availability of capital and buyer confidence.[7]

Related: Times Are Good, so Start Working Now to Make Your Small Business Recession-Proof

The best way to begin to assess your company’s vulnerability to a recession 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. A valuation can also provide you with an understanding of what could happen to the value of your company in a downturn and how long it might take to recover that value.

Armed with that information you can begin to look at various factors that might help you to prepare so that you can either take immediate action to transition ownership, take actions to reduce economic risk and understand the extent that your retirement could be impacted by a recession.

 

[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] U.S. Census Bureau. 2012 Survey of Business Owners.

[5] Pew Research Center

[6] National Bureau of Economic Research.

[7] Institute for Mergers, Acquisitions and Alliances. M&A in the United States.