Recession impact on M&A: what changes for a merger or acquisition?

Why valuations fall in a recession

In a recession, valuations are hit by a double downward effect. First, lower earnings: when consumers cut back their spending, turnover and EBITDA decline, especially for non-essential goods and services. Second, multiple compression: buyers, more cautious and facing more expensive financing, are prepared to pay a lower EBITDA multiple than at the top of the cycle.

The two effects compound each other: lower EBITDA multiplied by a lower multiple mechanically drives down enterprise value. That is why the same company can be worth significantly less at the bottom of the cycle than at its peak, even though its intrinsic quality has not changed.

M&A financing in a recession: scarcer and more expensive

Financing is the second lever affected. In uncertain times, lenders become more cautious: they tighten lending criteria, require more security and more 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, at a higher cost, means a larger equity contribution and therefore a lower capacity to pay. This tightening weighs on acquisition prices and lengthens the time needed to complete. Planning ahead and securing your financing early becomes a decisive advantage.

The valuation gap between buyers and sellers

A recession often widens the bid-ask gap: sellers stay 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 links part of the price to future performance; vendor financing, which spreads payment over time; and price adjustment clauses set out from the letter of intent onwards. These mechanisms reconcile expectations by sharing risk and upside between the parties.

M&A opportunities at the bottom of the cycle

A recession is not only a brake: it is also a window for well-positioned players. Strategic buyers with strong balance sheets 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 acquiring distressed businesses, where a strong buyer can turn around a viable company weakened by economic conditions. Historically, a significant share of value creation in M&A comes from deals launched at the bottom of the cycle. To find out more, see our guide to acquiring a distressed business.

How to value your business during a downturn

Valuing a business 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 — adjusting for one-off items linked to the crisis — so as not to lock the value in at a temporary low.

Two reflexes complete the analysis: do not anchor the valuation on the pre-crisis peak, and stress-test a discounted cash flow (DCF) model against different recovery scenarios. Finally, sector resilience and data from past cycles help to place value in a longer-term perspective. Our dedicated article sets out the approach: how to evaluate an acquisition opportunity.

Which sectors are the most recession-resistant?

Not all businesses react in the same way. Defensive sectors, which meet essential needs, see little change in demand; cyclical sectors, tied to discretionary spending, interest rates or property, are far more exposed. Knowing your sector's profile is essential for a realistic valuation.

Note: contrary to a common belief, construction is not a defensive sector. Highly dependent on interest rates and the property cycle, it is one of the most cyclical sectors and suffers markedly in a recession.

Using the slowdown to get ready

The bottom of the cycle is rarely the best time to sell, but it is often the best time to prepare a deal. Business owners who make good use of this period find themselves in a strong position when the economy turns.

• On the seller's side: make reporting more reliable, document the recurring nature of revenue, reduce dependence on a handful of customers and carry out a business valuation review to know which levers improve value before going to market.
• On the buyer's side: build a pipeline of targets now through a direct approach to off-market companies, so as to be ready when business owners decide to sell.
• On both sides: anticipate how lenders will read the file. The bank ratios analysed before any loan are more demanding in times of uncertainty; it is better to know where you stand before opening a negotiation.

If a price gap remains despite everything, a deferred price component can help bridge it: our guide to the earn-out in M&A details the clauses to negotiate.