Director's Cut: Can You Buy Your Way Out of a Recession?

2019 is finally here, and bringing with it obstacles and opportunities. If you follow ITR Economics, you know we are expecting the US economy to generally grow during the first half of this year. During the second half, US GDP will be relatively flat, and US Industrial Production will contract.

If your business closely mirrors either US GDP or US Industrial Production, then it will require some added internal efforts to see business grow for the year as a whole. There are many strategies from which to choose, and we are happy to discuss options with you. For today, lets consider acquisitions.

When your market is contracting, one way to grow your top line is to increase your market share by acquiring a competitor. Typically, as the economy declines, pessimism rises; a recession, therefore, is a good time to buy discouraged competitors. In addition, EBITDA values are likely to be lower, which can help with the purchase price. Because you’ve been following ITR Economics, you knew the recession was coming and have built up your cash reserves, putting yourself in a better position to make such an acquisition. Furthermore, the cost of any borrowing necessary for making the deal is also more favorable today than it will be a few years from now.

Taking it one step further, because you’ve been following ITR Economics, you know when the recession is likely to end, so you can make an acquisition with a much higher degree of confidence.

It is always helpful to look at the target company's cyclical trend to see how it matches up with yours and with the industry. This is an especially helpful step if you are looking for an acquisition that could help mute your own cyclicality.

An independent forecast of the target company's revenue – which will help you determine whether you are likely to see a worthwhile return on your investment as well as give you additional information to pass along to your banker – is another tool in your arsenal. Over the years, this type of information has helped our clients decide whether moving forward or walking away was the right choice for them.

The economy has not officially turned to the back side of the business cycle just yet, but a big move such an acquisition takes time and resources. Start planning now for how you are going to capitalize on this year’s contraction. The second half of 2019 will be here before we know it, and you don’t want to be left feeling like an opportunity has passed you by.

Jackie Greene
Director of Economics