Should Uncertainties In The Market Impact Your Deal-Making?
There are undoubtedly many uncertainties and changes happening in the economy right now. Many businesspeople are feeling those uncertainties currently due to the stock market correction, increasing interest rates, inflation, world events, and more. I want to talk about those changes with you in this solocast of the DealQuest Podcast, and determine whether they should impact your deal-making, and if so, how?
CHANGES IN THE ECONOMY
Over the years, I’ve discussed many ways to initiate growth, especially during positive economic times. I have also preached about not becoming a self-fulfilling prophecy by focusing too heavily on recessions and market downswings. The temperature in a lot of spaces all over the world is that of uncertainty and unease, and many people have a lot of questions.
- How should these uncertain times affect my deal-making?
- Does it affect my timing?
- Does it affect the types of deals I’m making?
- Does it affect valuations?
THE FUNDAMENTAL PRINCIPLE
Regardless of where the economy is, no matter what’s going on in the world, the underlying principle is this: There are still deals that need to be done. Naturally, the context and mechanics of deals in new or uncertain circumstances may change, but that doesn’t eliminate the fact that there will always be deals that need to be made and opportunities that come about even in challenging economic times.
This leads me to my next point: These deals in uncertain or adverse circumstances do not mean they are automatically less attractive. In fact, if you are smart, you can turn challenging times into great opportunities. As a smart dealmaker, you should be looking for deal-driven growth consistently, and adverse circumstances are no exception to that.
THE CONCERNING FACTORS
Establishing that a dealmaker shouldn’t lose sight of deal-driven growth is only the first step. Just because deals will always need to be made and opportunities will always be available doesn’t exclude one’s concerns during a shaky economy or impactful world event. What are some of those concerns?
CONCERN: INTEREST RATES
Especially in the U.S., interest rates continue to rise. In November 2022, several economists forecasted the Fed to raise its benchmark rate even higher leaving borrowers with a 4.75-5% range by March of 2023. This increase in interest rates has and will continue to cause the cost of capital to increase.
About a year ago, I did a solocast in which I discussed some research I did that showed there was no correlation between interest rates and the volume of deals. That tells us that deals are being made regardless.
Let’s look at an easy example most will understand: Real Estate. In rising interest rate environments sales prices for properties tend to decrease. With the cost of capital increasing, that makes sense. And, although there is often a period of disconnect when sellers are looking for yesterday’s prices and buyers want to buy at today’s lower prices, over time sellers get realistic, and deal flow picks up again. The same is true in the business deal market.
In Episode 197, I discussed this topic with John Warrillow (the accompanying blog post can be found here). We discussed at length how sometimes buying low and selling low can potentially be better than buying high and selling high. Check out that episode for that interesting discussion.
The effects are being felt globally of inflation in a post-lockdown world that’s still enduring the Russian-Ukrainian War. U.S. inflation rates are the highest they’ve been in recent times, with November 2022 seeing a 7.75% inflation rate. Inflation is something to take into consideration, but like interest rates, it's not something that should impede your ability to make smart, successful deals and in some cases can help facilitate deals getting done.
A smaller company that is experiencing difficulty raising prices but is experiencing higher costs due to inflation may be more amenable to being acquired, merged, or ever brought on via acqui-hire (where a company is acquired primarily for its employees rather than its products or services, a.k.a “talent acquisition”).
CONCERN: SUPPLY CHAIN DISRUPTION
Supply chain disruption has been a challenge for many companies in industries like retail, construction, and distribution. While that might cause economic pressure for some, it could provide deal opportunities for others. For instance, say you have an incredible supplier relationship that competitors in your industry do not have. Of course, you can use this to your advantage against your competitors in terms of organic growth, but maybe making a deal might be a smarter choice. There are multiple ways to go about this:
- Negotiating a merger or acquisition deal with your competitor. This allows your company to grow and allows the acquired or merged company to gain access to your good relationship with your supply.
- Structuring joint-venture deals with the businesses that are having trouble with supply.
- Building an additional business based on that good supplier relationship, and becoming a point-of-contact relationship for competitors who do not have the same access to the supply you do.
These types of deals can help reinforce a business, or even a whole industry, during economic uncertainty, however, you should be wary of careless dealmakers and the mindset of taking multiple weaker companies to combine them into one larger, stronger company. It doesn’t work that way.
CHALLENGES CAN CREATE OPPORTUNITIES
History shows us that economic or market uncertainty isn’t the end of the world; in fact, it can sometimes lead to very beneficial deals that would otherwise not be available. Allowing yourself to break free from fear of the unknown and from incorrect assumptions about the adverse impact of certain factors will cause you to become a more creative and more proficient dealmaker. Adversity can, and does, foster growth, and some of the strongest businesses have been built during recessions.
It’s also extremely important to not make assumptions based on these challenging factors. It’s vital to understand that how uncertainties impact one industry or sector, may not impact another in the same way. It can be more impactful for some, whereas others might not feel any impact at all. This leads to making sure that you’re evaluating your business, your sector, your industry, and your own geography and not relying on the commentary of the so-called pundits speaking in generalizations. Do your own due diligence and research, and keep that deal-makers mindset working for you.
I am not trying to encourage anyone to throw caution to the wind and ignore adversities in the market or the economy -- quite the opposite. My goal here is to dissuade dealmakers from leading with fear, and instead, leading with intent and focus. Being aware of adverse climates is part of the deal-making process, and what you do in non-ideal circumstances can be just as important as what you do during the most ideal of circumstances. Take stock of what’s happening in your space, how the economy or any other situation is impacting your space, and proceed accordingly.
I want you, my listeners, to understand that having concerns or being cautious isn’t wrong, but neither is optimism, and that disadvantageous circumstance can lead you to be a better dealmaker.
• • •
For my full discussion and more on the topic:
Listen to the Full DealQuest Podcast Episode Here
Corey Kupfer is an expert strategist, negotiator, and dealmaker. He has more than 35 years of professional deal-making and negotiating experience. Corey is a successful entrepreneur, attorney, consultant, author, and professional speaker. He is deeply passionate about deal-driven growth. He is also the creator and host of the DealQuest Podcast.
If you want to find out how deal-ready you are, take the Deal-Ready Assessment today!