M&A Insights

Positioning a Company for an Exit Transaction in an Inflationary Environment


We have heard for several months now about how inflation has caused a general uneasy feeling and required businesses to pass higher prices on to consumers, ultimately impacting consumer spending. We are aware of situations of business owners in the middle of a sell-side transaction, only to have things quickly unravel due to profitability declines or challenging outlooks. Executing a sell-side transaction is complicated enough without inflationary headwinds, so what should business owners be focused on when contemplating or executing a sell-side transaction?

Do not lose sight of profitability measures

Cash flow is king in all businesses but equally important are quantifiable measures of profitability. A focus on profits and margins will go a long way in giving potential buyers comfort as to the sustainability and viability of a business. Maintaining or growing EBITDA margins is paramount to maintaining enterprise valuations and is one determinant for buyers to evaluate in determining operational efficiency. Consistent and improving EBITDA margins are one key measure of performance and critical for business owners to monitor and evaluate frequently, not just at the end of the year. Growing revenues are not necessarily indicative of a growing enterprise, especially in an inflationary environment.

Measure employee output to ensure not doing less with more bodies

Unemployment figures have been one focus as we have navigated a pandemic and the recent economic headwinds. It can be hard to rationalize how the current low unemployment environment exists when there are so many job openings and too few qualified candidates. This nuisance has forced many companies to hire workers who are on average less skilled and productive, resulting in declining productivity, even before considering the rising labor cost. Business owners need to have a firm handle on how historical productivity and profitability correlate with headcount to ensure they are not doing less with more employees.

Do not get lost in macro-level economic policies or results. Focus on what you can control.

Consumer sentiment of having to work more to buy less in an inflationary environment has many business owners concerned about consumer spending trends and the effects of rising interest rates and price inflation even before factoring in the current geopolitical challenges and recession fears. One thing is for certain, all things cycle, and the economy will not sputter forever, and we will be able to confirm the recovery as either a “V” or “U” shaped by looking in the rear-view mirror. The underlying economic conditions are important but beyond a business owner’s control, while operating an efficient and profitable business is within an owner’s control and a key element to being “rewarded” in the current M&A market.

Use past performance as a guide to what the future holds

Profitability growth is a critical measure for how a business has performed through the challenges of the past few years. We are all aware of business models that were the “darlings of covid” with skyrocketing revenue, unit sales and profitability growth, fall back to earth and need to reposition their business offerings to be relevant in our current environment. These are business models that most buyers are going to discount in terms of valuation and key transaction terms. Rather, well run, “A” quality companies with steady profitability growth are highly sought after, and a characteristic that many buyers, both strategic and financial, have been willing to pay a premium to acquire in the current M&A market.

In summary, an investment banking firm with experience in navigating multiple economic cycles can focus business owners on the key merits of their business and establish realistic benchmarks that reflect the needs of prospective buyers in the current M&A market, to assist them towards attaining a successful outcome.