Second half 2022 opportunity

  • Private equity
  • 8/3/2022

As we move into the second half of 2022, there are a lot of adverse conditions we are facing and questions of how we can meet these challenges. As we, at CLA reflect...

As we move into the second half of 2022, there are a lot of adverse conditions we are facing and questions of how we can meet these challenges. As we, at CLA reflect on the first half of 2022 which by historical measures has gotten off to a great start, yes it may not be 2021, but there may never be a 2021 M&A year again, we are very optimistic.

We wanted to share our top 5 thoughts on how to manage in our current environment to be prepared for upcoming opportunities whether you are buying, selling or raising capital.

  1. In the short-term, rising interest rates present the greatest challenge. Businesses need to focus on managing working capital and ensuring their company’s balance sheet is strong. Extending maturities to remove near-term financing pressures and hedging some floating rate exposure through swaps or a term facility can be wise moves.
  2. The prospect of recession is the next most pressing problem. Ranking your most critical initiatives will help identify where to pare without jeopardizing essential functions. Reach out to lenders proactively and brief them on steps being taken. Lenders will appreciate this, and the goodwill will lay a foundation should you need to approach them for borrowing waivers or amendments.
  3. Longer-term, inflation is most worrisome. Operating in a rising cost environment puts a premium on careful product pricing, controlling costs through deliberate purchasing, and managing working capital that includes keeping accounts receivables as low as possible. Businesses need to verify the finance, HR, purchasing, marketing and other key functions respond in a coordinated way to inflation’s challenges.
  4. Since employee engagement is especially critical in these stressful scenarios, convey to your employees how rising interest rates, inflation or a recession impact your business. Communicate your strategy for getting through tough times. This also is the time to solicit employees’ suggestions for realizing economies and courting customers.
  5. As for talent, this may be a good time to pursue strategic talent acquisitions that would have proven impossible previously and to recognize that younger talent seeks personal and professional development to further their careers.

Rising interest rates and recessions typically lead to reduced deal volumes – and the deals done can be at lower multiples to discount current adverse business conditions and reflect reduced public company comparables. Yet, that said, high-quality businesses with strong financial statements and momentum can always find buyers. With all the economic headwinds, we are detecting  longer sale processes driven by buyers diligence and sellers’ uncertainty. For the good news in disruption, companies with strong balance sheets will find it pays to be a countercyclical buyer and source opportunities previously unavailable.  

Finally, start thinking strategically about enhancing the long-term value of your business you have worked so hard to create.

This blog contains general information and does not constitute the rendering of legal, accounting, investment, tax, or other professional services. Consult with your advisors regarding the applicability of this content to your specific circumstances.

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