Clarkston Consulting
Skip to content

Acquisition Strategy During a Recession

As businesses begin to slowly open after stay-at-home orders are eased, it is clear that while some have weathered the beginnings of this economic recession, other businesses have suffered disastrously or have closed their doors permanently.

With so many businesses impacted during the economic shutdown, the market is flooding with attractive investment opportunities that companies who have weathered the shutdown are looking to attain. For private equity firms and other businesses who command capital and other financial assets, these attractive investments and assets offer an opportunity for growth and massive ROI. This leads to companies needing to consider their acquisition strategy.

Acquisition Strategy: Private Equity Firm Partnership

For private equity firms, a critical component for staying competitive is the consistent deal flow. During the next 2 to 3 quarters, businesses must continue to watch the market in these unprecedented conditions because of the increased difficulty and risk in making investments. However, many consumer products, retail and life sciences companies who are well-positioned for the future coming out of COVID-19 economic lockdown will be looking for private equity firms as a critical source for must needed cash investments.

Companies who are seeking quick sources of cash or income might choose to sell a piece of their equity in their firm at a discount due to the current economic conditions. This provides a good opportunity for private equity firms to purchase equity or invest in undervalued assets, maintain positive deal flow, and deliver significant returns to investors.

Telling a Good Investment Apart from a Bad One

Although the saturation of the market with undervalued assets means that private equity firms have more opportunity to invest at privileged entry positions, it also means that they must be careful in choosing which businesses to invest or become involved with. Spotting a good investment from a bad one means anticipating which businesses have the capacity to survive and which will not.

There are some warning signs that hint at when bad investments have been made. Having continued high costs after initial investment with little profit may be okay at first, but there must be a sustainable business model in place for the business to survive. Having return-on-investment is the number one indicator for knowing when a good investment has been made.

Moreover, not knowing the best market timing for investment can hinder business’s success. Spending time investigating market trends and seeking out investments that diversify your business’s portfolio help limit the risk of placing all your assets in one place.

As COVID-19 continues to complicate the market situation, many companies will be looking for cash infusions from private equity firms. While some of these will be strong companies seeking capital in a constrained environment to transform their business into new realities, other companies will be in very difficult economic situations. These companies will also be looking for cash and capital, however, the goal will be to simply be able to make payroll.

In the Consumer Products industry, many staple products and items deemed “essential” have seen increased demand and will be positioned positively during; as consumer trade down brands, towards essentials products via direct to consumer channels, having the foresight to understand which business models will last in the new normal is critical.

In the Life Sciences industry, understanding the portfolio of a company and the potential to commercialize the product, can be seen as a critical indication as to whether and investment is a good or bad one. Retail has been impacted heavily, and those who arrived at the shutdown already struggling likely won’t make it out; but those who have already initiated a transformation aimed at the new consumer, have positioned themselves well to secure new investments.
For private equity firms, this makes it increasingly difficult to separate good investments from risky investments. One way that these firms can avoid these bad investments and reduce investment risk, while shortening deal cycles and avoiding false negatives is to utilize industry-focused consulting firms.

Looking Ahead

Many successful businesses have been born or turned around successfully, during recessions. As a result, the assumption that creativity and innovation are spurred on in times of recession, is proven true. Businesses who have the capital to do so, should continue to look for new deals and opportunities to invest, rather than remaining stagnant on the sidelines.

What we have seen from past economic recessions, is that early stage investment is more resilient. Although deal percentages are currently down 26%, the last recession showed that there was a 34% increase in private equity, angel and seed activity during the early stages of recovery. Technology and life sciences companies are well positioned because of their ability to be flexible, and command the capital needed to make investments in an economic downturn.

Looking ahead, opportunistic businesses can recruit capital influx from private equity guided by industry-focused consulting firms to ensure that they capitalize on the best investment opportunities. Making sure that your business remains competitive and successful as COVID-19 restrictions are lifted means taking advantage of the increasingly available undervalued assets.

Subscribe to Clarkston's Insights

  • I'm interested in...
  • Clarkston Consulting requests your information to share our research and content with you.

    You may unsubscribe from these communications at any time.

  • This field is for validation purposes and should be left unchanged.

Contributions by Ashley Stufano.

Tags: Strategic Advisory, Strategic Innovation