Why Pausing M&A in a Downturn Can Be a Mistake| Conclave Partners
Market downturns usually make companies more cautious. Buyers worry about financing. Sellers worry about valuation. Investors worry about timing. Boards and owners often decide that the safest option is to pause M&A until conditions improve.
That reaction is understandable, but it can also be expensive. M&A in a downturn is not about ignoring risk. It is about separating real risk from generalized fear. At Conclave Partners, the better question is whether the specific business, buyer, financing structure, and transaction logic still make sense under more conservative assumptions.
Some deals should stop. Some sellers should wait. Some buyers should preserve cash. The mistake is treating a downturn as an automatic reason to suspend analysis. In many small and mid-sized business transactions, the best decision is not “pause” or “proceed.” It is “re-underwrite.”
Why companies usually pause M&A when the market turns
Companies pause M&A during downturns for rational reasons. Earnings visibility declines. Lenders become more selective. Buyers may reduce leverage assumptions. Sellers may anchor to valuations from a stronger market. That creates a bid-ask spread, where buyers want a lower price and sellers do not want to accept it.
Global data shows how this caution affects deal volume. PwC reported that global deal values rose 5% from 2023 to 2024, while deal volumes fell 17%. In its 2025 mid-year outlook, PwC reported a similar pattern: deal values increased 15% between the first half of 2024 and the first half of 2025, while deal volumes decreased 9%. This suggests that capital did not disappear, but it became more selective and concentrated in fewer transactions.
For smaller companies, the effect can be more personal. A founder may not want to sell into a weaker market after years of building the business. A buyer may hesitate to acquire a company whose last 12 months are no longer representative. A lender may approve a lower debt amount than expected.
The danger is that caution becomes paralysis. A business owner who stops preparing may lose months of readiness work. A buyer who stops reviewing targets may miss a competitor, supplier, or local market leader that becomes available only because the market is unsettled.
Downturns do not stop good deals; they change the rules
A downturn changes the rules of M&A, but it does not eliminate the logic of M&A. Strategic buyers may still need new customers, products, geographies, licenses, technology, or operating capacity. Investors may still have committed capital to deploy. Owners may still need succession, liquidity, or a transition plan.
What changes is the standard of proof. A buyer who might have accepted an optimistic forecast in a growth market will usually demand a downside case. A lender will focus more heavily on debt service coverage. A seller will need clearer evidence that revenue is durable and margins are not temporarily inflated.
This is why downturn M&A is less forgiving. Weak processes are exposed. Poor financial records become a serious obstacle. Customer concentration and unclear working-capital needs become harder to ignore.
Research on experienced acquirers also argues against blanket inactivity. Bain examined 2,845 companies during the 2008–2009 downturn and found that companies completing at least 1 deal per year during the downturn generated 120 basis points more in total shareholder return than companies that stayed inactive. McKinsey has also reported that programmatic acquirers outperformed peers by an average of 2.3 percentage points annually, measured by total shareholder return.
These studies are not instructions to acquire indiscriminately. They mainly show that companies with repeatable M&A capabilities can use downturns with more discipline than occasional, reactive buyers. For small and mid-sized businesses, the lesson is practical: the downturn is not the strategy. The strategy is having a clear acquisition thesis, conservative underwriting, and the operational capacity to integrate what is bought.
Why downturns can create better acquisition opportunities
For buyers, a downturn can improve the quality of available opportunities. Owners who were unwilling to discuss a sale in a strong market may become open to conversations. Competitors may lose momentum. Family-owned companies may decide that succession risk is too high to carry alone. Non-core divisions may become available as larger companies simplify.
Lower buyer competition can also matter. When financing is harder, financial buyers who rely heavily on leverage may become less aggressive. A strategic buyer with a strong balance sheet may then have a better chance to acquire a target without entering an overheated auction. This does not always mean a bargain price, but it may mean a more rational negotiation.
Valuation expectations may also become more grounded. In strong markets, sellers often price based on peak earnings and optimistic growth. In a downturn, buyers usually normalize earnings more carefully. They ask whether a revenue dip is temporary, whether margins can recover, and whether the customer base is still stable. This can reduce speculative pricing, especially in businesses that had benefited from temporary demand spikes.
The opportunity is strongest when the acquisition logic does not depend on the economy recovering quickly. A buyer may acquire a local competitor to consolidate service routes, a supplier to protect margin, a distribution channel, a technical team, or a recurring-revenue business with low churn.
Distressed M&A is a separate category and should be handled carefully. A struggling business may look cheap, but it can carry hidden liabilities, employee instability, tax problems, customer losses, litigation risk, or urgent working-capital needs. In a downturn, price is only one part of value. The real question is whether the buyer can stabilize and improve the company after closing.
Why sellers should not automatically wait for better conditions
Sellers often assume that waiting is safer. Sometimes it is. If a company has temporary margin pressure, an unfinished turnaround, unresolved litigation, or poor books, waiting may improve value. But waiting is not always free.
The key issue is whether the business will look better or worse in 12 to 24 months. A resilient company may stand out more during a downturn because buyers can see that revenue, customer retention, and cash flow held up under pressure. A weaker company may suffer declining trailing financials, making the future sale harder rather than easier.
For a business owner, the sale story matters. Buyers do not only evaluate the latest EBITDA number. They evaluate the trend behind it. A company that declines 5% in a difficult market but retains customers and protects gross margin may be more credible than a company that grew quickly in a boom but cannot explain why demand slowed.
Conclave Partners would usually frame this as a readiness question rather than a market-timing question. Owners should ask whether their financials, management team, customer base, contracts, and operating processes are strong enough to survive diligence. If not, the downturn should be used for preparation rather than passive waiting.
Preparation has value even if the company is not marketed immediately. This includes cleaning financial statements, documenting add-backs, reviewing customer concentration, separating owner expenses, strengthening management, organizing contracts, resolving tax issues, and building a credible forecast. These steps improve optionality and reduce late-stage renegotiation risk.
How valuations change in a downturn
Valuation in a downturn is rarely a simple across-the-board discount. Multiples may compress, but not evenly. High-quality companies with recurring revenue, low churn, defensible margins, and limited owner dependence can still attract serious interest. Cyclical, project-based, or highly concentrated businesses may face sharper discounts.
The IBBA and M&A Source Q4 2024 Market Pulse highlights how size and quality affect private-company valuation. The report showed average multiples by deal size from 2021 to 2024. In Q4 2024, businesses below $500,000 in purchase price averaged 2.0 times SDE, while the $500,000 to $1 million segment averaged 2.8 times SDE and the $1 million to $2 million segment averaged 3.0 times SDE. In the lower middle market, the $2 million to $5 million segment averaged 4.1 times EBITDA, and the $5 million to $50 million segment averaged 4.1 times EBITDA.
These are broad market indicators, not valuation rules. Actual business valuation depends on industry, growth, customer concentration, asset intensity, margins, revenue quality, owner dependence, and buyer type. A recurring-revenue software services company and a project-based construction subcontractor may not trade at the same multiple even if both report the same EBITDA.
Conclave Partners treats downturn valuation as a scenario exercise. A buyer should not only ask what the business earned last year. The buyer should test what happens if revenue falls 10%, gross margin compresses, receivables slow, or financing costs rise. A seller should prepare the same analysis before a buyer asks for it.
Deal structure becomes more important when valuation certainty declines. Earnouts, seller notes, rollover equity, deferred payments, escrow arrangements, and working-capital adjustments can bridge valuation gaps. Each mechanism has trade-offs. Earnouts can create disputes over post-closing control. Seller financing creates credit exposure for the seller. Rollover equity gives the seller upside but extends risk. Working-capital mechanisms protect buyers but can surprise sellers who have not normalized cash, receivables, inventory, and payables before signing.
Legal and financial advice are especially important here. Letters of intent should define price, structure, exclusivity, financing assumptions, working-capital treatment, conditions to closing, and diligence scope. Purchase agreements should address representations, warranties, indemnities, disclosure schedules, employee obligations, consents, and closing deliverables. A downturn does not change these fundamentals, but it makes weak drafting more costly.
Financing risk: the real reason many deals pause
Many paused transactions are not caused by lack of interest. They are caused by financing risk. When interest rates are higher or lenders tighten standards, the same business may support less debt. That can lower the price a buyer can pay or increase the equity required at closing.
The Federal Reserve’s July 2025 Senior Loan Officer Opinion Survey reported tighter lending standards and weaker demand for commercial and industrial loans to firms of all sizes during the 2nd quarter of 2025. In October 2025, the Fed also reported that banks were less likely to approve commercial and industrial loan applications from firms with high trade exposure. This matters for acquisition financing because lenders are underwriting not only the target, but also the combined borrower’s resilience.
SBA financing remains relevant in U.S. small business acquisitions, but it is not a guarantee of easy execution. The SBA stated that in fiscal year 2025 it guaranteed 84,400 7(a) and 504 loans totaling $44.8 billion, including 77,600 7(a) loans for $37 billion. SBA also states that 7(a) interest rates are negotiated between borrower and lender but are subject to SBA maximums linked to the prime rate or an optional peg rate.
Seller financing can bridge gaps, but it must be structured carefully. The IBBA and M&A Source Q4 2024 highlights showed seller financing in Q4 2024 at 12%, 11%, 15%, 10%, and 10% across the 5 reported deal-size segments. The same report showed cash at close ranging from 81% to 88% across those segments. These figures indicate that seller financing is common enough to matter, but not a substitute for a financeable deal.
Due diligence should become sharper, not slower
Downturn diligence should focus on resilience. The question is not whether the company had a good year in favorable conditions. The question is whether the company can withstand weaker demand, slower collections, higher costs, and tighter credit.
Revenue diligence should examine customer concentration, churn, contract terms, renewal history, backlog, pricing power, pipeline quality, and the difference between recurring and one-off revenue. Buyers should be careful with revenue that depends on a few customers, temporary projects, or a founder’s personal relationships.
Margin diligence should examine gross margin trends, supplier exposure, labor availability, inventory, receivables aging, and maintenance capital expenditure. A business that looks profitable can still strain cash if customers pay slowly or inventory becomes obsolete.
Operational diligence should focus on management depth and owner dependence. If the seller is the main salesperson, estimator, technical expert, and customer relationship manager, the business may be difficult to transfer.
When pausing M&A is still the right decision
A disciplined article about downturn M&A must also say when pausing is correct. Buyers should be wary when the strategic logic is vague, the target’s revenue is deteriorating without a credible explanation, the financing case depends on optimistic recovery, or diligence access is poor. A low price does not fix a broken thesis.
Sellers should consider waiting when financial records are not ready, litigation or tax problems are unresolved, management is too dependent on the owner, or valuation expectations are far above what the current market can support. In these cases, a failed process can damage credibility and waste time.
Pausing can also be right when the owner’s personal timing does not align with the transaction. Selling a business requires attention, disclosure, negotiation, and emotional discipline.
A practical framework for evaluating M&A during a downturn
For buyers, the framework should begin with strategic fit. The target should solve a clear problem or create a clear advantage. After that, the buyer should test downside cash flow, debt capacity, integration burden, customer retention, and management continuity. The acquisition should still make sense if the economy does not recover quickly.
For sellers, the framework begins with readiness. Clean books, defensible adjustments, clear customer data, documented processes, organized contracts, and a credible management team reduce uncertainty. Sellers should also assess whether waiting is likely to improve the company’s story or simply expose the business to more risk.
For investors, downturns reward selectivity. The best opportunities usually combine reasonable valuation, durable demand, operational improvement potential, and a structure that shares risk appropriately. Investors should avoid confusing lower price with lower risk.
The central discipline is staying active intellectually while remaining selective transactionally. That means continuing market conversations, readiness work, valuation analysis, target mapping, and financing discussions, even when it is not yet time to sign a letter of intent.
Conclusion: do not pause thinking just because the market is uncertain
A downturn is a reason to be more disciplined, not a reason to stop thinking. Buyers should underwrite more conservatively. Sellers should prepare more carefully. Investors should separate resilient businesses from businesses that merely look cheap.
The practical mistake is not refusing to do a bad deal. That is good judgment. The mistake is stopping all M&A work until conditions feel comfortable. By the time the market feels safe again, the best opportunities may have moved, and the most prepared sellers may already be in serious conversations.
For Conclave Partners, the right approach is not to force transactions through uncertainty. It is to keep evaluating, preparing, and structuring deals with more precision than the market required in easier conditions.
FAQ
Should companies stop M&A activity during a downturn?
Not automatically. Companies should stop weak or poorly financed deals, but they should continue evaluating strategic opportunities. The correct response is stricter underwriting, not blanket inactivity.
Is a downturn a bad time to sell a business?
It depends on the business. A resilient company with stable revenue, clean financials, and strong margins may still attract credible buyers. A company with unresolved issues may benefit from preparation before going to market.
Do business valuations always fall during a recession?
No. Valuation multiples can compress, but the effect varies by sector, size, revenue quality, profitability, customer concentration, and buyer demand. Reliable data also varies by market, so single-number claims should be treated cautiously.
Why do M&A deal volumes decline when the economy slows?
Deal volumes usually fall because financing becomes harder, buyers become more selective, sellers resist lower valuations, and diligence risk increases. That does not mean all dealmaking stops.
Can buyers get better acquisition opportunities in a downturn?
Yes, but not automatically. Buyers may face less competition and more realistic pricing, but they must also manage revenue risk, integration risk, working-capital pressure, and financing constraints.
How does tighter financing affect small business acquisitions?
Tighter financing can reduce debt capacity, increase equity requirements, lower purchase prices, or increase the need for seller financing. It can also extend closing timelines.
What should owners do if they are not ready to sell immediately?
They should use the time to improve readiness. That means organizing financials, documenting operations, reviewing customer concentration, cleaning up contracts, strengthening management, and preparing a credible forecast.