What is the impact of a recession on a merger and acquisition deal?
Economic slowdown, scarcer financing, valuations under pressure: a recession changes the game for a merger or acquisition. Here is how it works, where the opportunities are, and how to value your company in this context.
A recession does not bring the M&A market to a halt: it changes the rules. Valuations tighten, financing becomes scarce, but opportunities open up for solid players. Understanding these mechanics lets you buy, sell or prepare at the right time.
This article reviews the effect of a slowdown on valuations and financing, how to bridge the price gap between buyers and sellers, the opportunities of the low point in the cycle, and the method for valuing a company in this context.
Why valuations fall in a recession
In a recession, valuations undergo a double downward effect. First, the drop in earnings: when consumers cut spending, revenue and EBITDA decline, especially for non-essential goods and services. Then, the compression of multiples: buyers, more cautious and facing more expensive financing, agree to pay a lower EBITDA multiple than at the top of the cycle.
The two effects compound: a falling EBITDA multiplied by a reduced multiple mechanically pulls enterprise value down. That is why the same company can be worth significantly less at the bottom of the cycle than at its peak, without its intrinsic quality having changed.
Scarcer and more expensive financing
Financing is the second lever affected. In times of uncertainty, lenders become more cautious: they tighten lending conditions, require more collateral and equity, and raise the cost of debt. Access to credit shrinks precisely when companies need it most.
For leveraged deals, the consequence is direct: less debt available and more expensive means a higher equity contribution, hence a reduced capacity to pay. This tightening weighs on acquisition prices and lengthens closing timelines. Anticipating and securing your financing upfront becomes a decisive advantage.
The valuation gap between buyers and sellers
A recession often widens a price gap (bid-ask gap): sellers remain anchored to pre-crisis valuations, while cautious buyers offer lower prices. This disagreement slows down — or even blocks — transactions.
Several tools can bridge this gap without breaking the deal: the earn-out, which indexes part of the price to future performance; the seller's credit (vendor loan), which spreads payment over time; and the price adjustment clauses defined from the letter of intent onwards. These mechanisms reconcile expectations by sharing risk and upside between the parties.
The opportunities of the low point in the cycle
A recession is not only a brake: it is also a window for well-positioned players. Strategic acquirers with a solid balance sheet and funds with cash to invest (dry powder) can acquire quality targets, temporarily discounted, at more attractive prices.
The bottom of the cycle also favours the takeover of distressed companies, where a solid buyer can turn around a viable business weakened by the economic climate. Historically, a significant share of value creation in M&A comes from deals initiated at the bottom of the cycle. To go further, see our guide on taking over a distressed company.
How to value your company during a downturn
Valuing in a recession requires method. The starting point remains cash flow: it is the real ability to generate cash, more than accounting profit, that underpins value. You then need to normalise earnings — correct exceptional items linked to the crisis — so as not to lock in a value based on a temporary trough.
Two reflexes complete the analysis: do not anchor the valuation on the pre-crisis peak, and test the sensitivity of a discounted cash flow (DCF) model to different recovery scenarios. Finally, the sector's resilience and data from past cycles help place value over the long term. Our dedicated article details the approach: how to evaluate an acquisition opportunity.
Which sectors best withstand a recession?
Not all activities react in the same way. Defensive sectors, which meet essential needs, see their demand vary little; cyclical sectors, tied to discretionary spending, interest rates or real estate, are far more exposed. Knowing your sector's profile is essential for a realistic valuation.
More resilient sectors (defensive)
- Healthcare
- Food and consumer staples
- Utilities (energy, water)
- Discount retail
More sensitive sectors (cyclical)
- Luxury and discretionary products
- Travel and tourism
- Automotive and durable goods
- Construction and real estate
Note: contrary to a common belief, construction is not a defensive sector. Highly dependent on interest rates and the real-estate cycle, it is among the most cyclical and suffers markedly in a recession.
In conclusion
A recession compresses valuations and tightens financing, but it does not stop M&A: it redirects it. The players who prepare their financing, know how to bridge the price gap (earn-out, vendor loan) and value with method turn the low point of the cycle into an opportunity. To explore your business sale or acquisition options in the current context, let's discuss your project.
Frequently asked questions about recession and M&A
How does a recession affect company valuations?
Through a double effect: the drop in earnings (EBITDA) and the compression of multiples, driven by buyer caution and more expensive financing. Discretionary sectors are more exposed than essential ones.
Should you buy or sell a company during a recession?
It depends on your situation and your sector. A recession creates opportunities to acquire at attractive prices for solid players and funds with cash to invest, while sellers benefit from highlighting their stability and long-term potential.
How do you value your company during a downturn?
By starting from cash flow, normalising earnings, avoiding anchoring value on the pre-crisis peak, testing the sensitivity of a DCF, and taking into account the sector's resilience and past cycles.
Which sectors best withstand a recession?
Defensive sectors — healthcare, food and consumer staples, utilities, discount retail — withstand better than cyclical sectors such as luxury, travel, automotive, or construction and real estate.
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