As the global economy continues to grapple with uncertainty—rising interest rates, geopolitical tensions, and job losses—investors and business leaders looking to acquire small to medium-sized businesses (SMBs) must weigh several critical factors. Below are the top 3 issues to keep in focus during acquisition planning and due diligence over the next several months:
- Valuation Challenges Amid Economic Volatility
Economic fluctuations can significantly distort business valuations. With inflationary pressures and high interest rates, many SMBs may appear undervalued or overvalued depending on the sector and region. Revenue projections can be unreliable if demand is declining or if customers are reducing spending.
Key considerations:
- Stress test financial models using conservative assumptions.
- Look for revenue durability and customer retention metrics.
- Factor in the cost of capital and its impact on return expectations.
- Access to Financing and Credit Conditions
The tightening of credit markets has made acquisition financing more expensive and less accessible. Traditional lenders have become more cautious, especially with businesses that lack robust balance sheets or consistent cash flows.
Key considerations:
- Explore alternative financing options (e.g., private credit, seller financing).
- Ensure the business has strong liquidity and minimal debt exposure.
- Consider earn-outs or staggered payment structures to align incentives.
- Operational Resilience and Supply Chain Risks
The past few years have shown how vulnerable SMBs can be to disruptions in supply chains, labor shortages, and geopolitical instability. An acquirer’s ability to assess and mitigate these risks is crucial for long-term success.
Key considerations:
- Evaluate supply chain diversification and vendor reliability.
- Review workforce stability and retention metrics.
- Analyze how inflation and input costs have been managed.
Conclusion
Acquiring SMBs in today’s economic climate requires demands even more rigorous due diligence, a deep understanding of market dynamics, and the agility to adapt to financial and operational headwinds.
