Recession M&A: Risks vs. Opportunities

Recessions can disrupt mergers and acquisitions (M&A), but they also create rare opportunities for savvy buyers. Lower valuations, distressed assets, and reduced competition make downturns an ideal time to acquire businesses - if you can navigate the risks. Here’s what you need to know:

• Risks: Tight credit markets, operational challenges, and hidden liabilities are common. Financing is harder to secure, and due diligence becomes more complex, especially in struggling industries.
• Opportunities: Buyers can secure businesses at 15–30% discounts, gain access to undervalued assets, and position themselves for growth during recovery periods.
• Key Trends: AI readiness is now a major factor in valuations, with businesses leveraging AI commanding higher multiples. Private credit and SBA loans are filling gaps left by stricter bank lending.

The key to success lies in thorough due diligence, creative financing strategies, and a clear investment thesis focused on resilient businesses. Buyers who act decisively in these conditions can achieve long-term gains.

Fundamentals of the M&A Market | The ABCs of M&A | Inorganic Growth in Recession | Grant Thornton

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Risks in Recession SMB Acquisitions

Acquiring small and medium-sized businesses (SMBs) during a recession comes with its own set of challenges. From tighter credit markets to operational vulnerabilities and shifting market dynamics, buyers must navigate a minefield of risks. Below, we break down the financial, operational, and market risks involved.

Financial Risks

Recessions often shrink financing options, making it harder to fund acquisitions through SBA loans. During financial crises, nearly 80% of banks tighten lending standards for commercial loans. Lenders typically lower loan-to-value ratios and impose stricter coverage requirements, leaving buyers with limited options. Navigating these hurdles requires a clear strategy for securing SBA funding to ensure the deal remains viable. This often pushes buyers to rely more on seller financing, which transfers financial risk to the seller. Historically, default rates on seller notes during economic downturns have exceeded 15%.

Even when financing is available, buyers generally push for steep discounts - ranging from 15% to 30%, and up to 40% in cyclical industries - to account for heightened uncertainty. Earnouts are often used to bridge valuation gaps, but they come with their own challenges, as disputes arise in 30% to 40% of such deals. Revenue streams can also become unstable, especially if the business relies on discretionary spending, as customers facing financial pressure tend to cut back on non-essential services.

Operational Risks

Taking over an SMB during a downturn brings added operational difficulties. Struggling businesses are often heavily dependent on key personnel, and there’s a 15% chance of losing critical employees during the transition. This can result in a loss of institutional knowledge and customer relationships - both crucial for stability during uncertain times.

SMBs, due to their smaller scale, are particularly vulnerable to supply chain disruptions. Tariff changes or other external shocks can force costly adjustments mid-acquisition. Additionally, the ratio of variable to fixed costs plays a significant role in a company’s ability to weather revenue downturns. Businesses with less than 30% of costs classified as variable face a higher risk of bankruptcy when sales drop.

"We're seeing a shift from opportunistic acquisitions to purpose-driven partnerships. Companies aren't just buying scale, they're buying specialization, geographic reach, and management capabilities."

Market Risks

Market unpredictability is amplified during recessions. Consumer spending often shifts toward essential services, leaving cyclical industries vulnerable to significant declines in demand. A major red flag is when a single customer accounts for more than 35% of revenue, as this creates a critical dependency. Additionally, financial stress among vendors or customers can lead to delayed deliveries or payments, potentially causing operational breakdowns.

The rise of AI has added a new dimension to market evaluations. Ramzi Ramsey, Senior Managing Director at Blackstone Growth, highlighted the impact:

"Companies who are viewed to benefit from AI tailwinds are seeing outsized multiples and deal activities; companies where AI is viewed to be a detractor, or if the AI impact is cloudy, may have no bid."

Policy and regulatory changes, such as sudden shifts in tariffs or trade policies, further complicate acquisitions. These changes may force businesses to rethink supply chains or adjust their models mid-deal, adding yet another layer of complexity for buyers.

Up next, we’ll look at how buyers can turn these challenges into strategic opportunities.

Opportunities in Recession SMB Acquisitions

While the previous section focused on the challenges, recessions also present unique advantages for those prepared to act. Economic downturns often shift the dynamics of M&A negotiations, creating opportunities that are harder to come by during periods of economic growth. Let’s dive into the key advantages, including lower valuations, access to distressed assets, and positioning for recovery.

Lower Valuations and Reduced Prices

Recessions often lead to a drop in business valuations, creating opportunities to acquire assets at discounted prices. Valuation multiples tend to shrink during economic downturns, sometimes by an entire multiple. For instance, a business previously valued at 5× EBITDA might sell for 4× or even less. In the lower middle market, sellers may accept offers as low as 85% of their benchmark valuations. This reduction in pricing creates an appealing entry point for strategic buyers. As Bain and Co. Partner Sri Rajan points out, timing is critical for unlocking long-term value.

Additionally, competition in the M&A market tends to thin out during recessions. In Q1 2025, global M&A activity dropped nearly 19% compared to the previous quarter, with middle-market deals ($100M–$1B) reaching their lowest level in a decade at just 496 transactions. Many corporate and private equity buyers are sidelined due to financing challenges and internal caution, leaving well-capitalized buyers with greater negotiating power.

Access to Distressed Assets

Economic downturns often force motivated sellers to seek liquidity, creating opportunities to acquire high-quality assets under temporary financial strain. For example, parent companies may divest non-core but profitable business lines, while founders facing uncertainty might accept lower offers. These situations often involve businesses with solid operations that are undervalued due to short-term pressures, not structural weaknesses.

Another avenue for acquisitions is through bankruptcy proceedings, particularly Section 363 sales under Chapter 11. These sales allow buyers to acquire assets free of prior claims, liens, and encumbrances. This minimizes successor liability and often results in prices well below market value. However, distinguishing between undervalued assets and inherently weak businesses is critical. Buyers who conduct thorough due diligence can secure valuable assets that might otherwise remain inaccessible, setting the stage for strategic growth.

Positioning for Recovery

Acquiring during a downturn offers the chance to capitalize on economic recovery. Historically, M&A slowdowns are followed by periods of rapid growth, with deal counts increasing in nearly 90% of years between 1990 and 2024. Strategic buyers use these opportunities to scale, acquire specialized capabilities, expand into new markets, and strengthen their management teams - advantages that would take years to achieve organically. By purchasing during the economic trough, buyers not only benefit from lower prices but also position themselves for superior returns when the market rebounds.

These opportunities highlight the importance of maintaining a balanced approach to M&A during recessions, where risks and rewards coexist. Strategic timing and careful planning can turn economic challenges into long-term gains.

Risks vs. Opportunities: Side-by-Side Comparison

Navigating recession-driven M&A decisions means carefully balancing risks against opportunities. While lower valuations and distressed assets can be appealing, they come with challenges like financing hurdles, operational complexities, and hidden liabilities. The goal is to make informed, strategic decisions - not reactive ones. Professional consultation services can help navigate these complexities.

Take valuation compression, for example. It can present discounts of 15-30% on well-prepared companies, but these discounts might also signal deeper, underlying issues - what some insiders call "cheap for a reason". On the other hand, financing constraints may limit traditional buyers, but they also open the door to creative capital structures and less competition. In 2026, a company’s AI readiness has become a critical factor. Businesses with clear AI advantages are commanding higher multiples, while those without a clear AI strategy may struggle to attract bids. These factors highlight the delicate balancing act buyers must perform.

Operational risks are another key consideration. Compressed timelines for transactions can increase due diligence risks. However, these same conditions create opportunities to acquire specialized capabilities, expand geographic reach, or secure experienced management teams - investments that could take years to develop organically. The challenge lies in distinguishing short-term financial pressures from deeper, structural problems.

The table below breaks down these risks and opportunities, along with strategies to mitigate the challenges.

Comparison Table

Factor	Risks	Opportunities	Mitigation Strategies
Valuation	Gaps between buyer/seller expectations; risk of overpaying if recession worsens	Acquire quality assets at 15-30% discounts; lower entry multiples	Use earnouts (10-15% of deal value) to bridge price gaps; leverage AI-powered valuation tools
Financing	Restricted credit markets; significant tightening of credit	Less competition from debt-reliant buyers; access to distressed liquidations	Structure deals with seller notes, equity-heavy financing, or SBA lending or other financing options; tap into private credit
Liabilities	Successor liabilities from distressed sellers; hidden legal or financial encumbrances	Acquire assets free of claims through Section 363 bankruptcy sales	Structure deals as asset purchases, not equity; negotiate escrows and holdbacks
Operations	Supply chain issues; challenges in separating integrated systems; owner dependence	Gain specialization, geographic reach, and seasoned management	Review force majeure clauses; tie purchase price to customer retention metrics
Technology	Risk from AI disruption; lack of bids for non-AI-enabled firms	Acquire AI-native infrastructure and efficiency gains at lower prices	Prioritize AI readiness during due diligence; focus on companies with clear AI advantages
Due Diligence	Tight timelines increasing the risk of missed operational flaws	Faster execution positions buyers for post-recession recovery	Use AI tools for quick data room analysis; focus on "Day 1" implementation plans

This side-by-side breakdown shows that while risks are very real, they can often be managed with the right strategies. By carefully weighing these factors, buyers can seize opportunities while minimizing potential downsides.

SMB-Specific Factors in Recession M&A

Sector-Specific Distress

The way small and medium-sized businesses (SMBs) are affected by recessions depends heavily on their industry. Sectors like healthcare and essential services tend to maintain their valuations since demand remains steady. On the other hand, cyclical industries - such as construction and consumer discretionary - often see valuations drop by 40% or more during tough economic times.

For instance, in April 2025, only 555 U.S. deals closed, marking the lowest monthly total since May 2009. Meanwhile, medtech mergers and acquisitions surged, hitting $92.8 billion by November 30, 2025. This disparity highlights a growing "valuation gap." Sellers often cling to peak-market price expectations, while buyers push for discounts to account for increased risks and higher borrowing costs. These valuation trends also have a direct impact on how deals are financed in a recessionary climate.

Private Credit and Financing Options

During recessions, traditional bank lending typically tightens. In the 2008–2009 financial crisis, 80% of banks reported stricter lending standards for commercial loans. As banks pull back, alternative financing options have stepped in to support SMB acquisitions. Private credit and direct lending, in particular, have become critical players in bridging the financing gap. By mid-2024, global private equity "dry powder" reached roughly $2.6 trillion, much of it allocated by non-traditional lenders willing to take on deals that banks shy away from.

For smaller acquisitions - typically those under $5 million to $10 million - SBA 7(a) loans remain a dependable option. These government-backed loans help mitigate lender risk, making them especially attractive during uncertain times. Buyers are also turning to seller notes and earnouts to resolve valuation disputes. However, it's worth noting that seller notes tend to carry higher risks, with default rates exceeding 15% during recessions. Platforms like Clearly Acquired assist buyers by crafting financing strategies that match deals with the right mix of SBA loans, private credit, and other funding sources.

Using AI Tools for Due Diligence

AI tools are becoming invaluable for SMB acquisitions during recessions, handling tasks like financial analysis, risk assessment, and synergy evaluation. Ramzi Ramsey, Senior Managing Director at Blackstone Growth, explained:

"Companies who are viewed to benefit from AI tailwinds are seeing outsized multiples and deal activities; companies where AI is viewed to be a detractor, or if the AI impact is cloudy, may have no bid".

Buyers are now leveraging AI-driven platforms to determine whether a target company’s use of AI boosts operational efficiency or creates a competitive edge through product differentiation. For example, Clearly Acquired's AI tools streamline due diligence by analyzing financials, assessing valuations, and identifying the best lenders for a deal. These tools also provide secure data rooms and automate key processes, reducing the risk of overlooking operational issues. This is especially important in fast-moving transactions, where earnout disputes impact 30–40% of deals.

Action Plan for Buyers

This plan focuses on actionable steps for buyers to navigate recession risks and seize opportunities effectively.

Building a Recession-Focused Investment Thesis

Look for targets with at least 70% recurring revenue tied to multi-year contracts, low customer concentration (top five clients accounting for less than 30% of total revenue), and services that remain essential even during economic downturns. Companies with solid fundamentals tend to retain stronger valuations compared to distressed ones during recessions.

Consider AI readiness as a key factor in your investment thesis. Businesses leveraging AI for operational efficiency or product differentiation often attract more capital and secure higher valuations. Additionally, prioritize targets with flexible cost structures, where over 50% of costs are variable, enabling quicker adjustments to revenue changes. For distressed opportunities, asset purchases may be safer than equity deals, as they help avoid taking on successor liabilities.

Finally, back your strategy with thorough due diligence to minimize risks.

Strengthening Due Diligence Processes

Recessions call for extra financial scrutiny. Invest in a quality of earnings (QofE) report (costing $50K–$150K) to confirm sustainable profitability and guard against potential accounting issues.

Ensure the business can operate profitably for at least six months without its owner, as owner-reliant operations carry higher transition risks during downturns. Test customer retention by assessing whether clients are likely to stay engaged even during financial challenges, instead of relying solely on past performance. Keep an eye on Debt/EBITDA ratios, targeting levels below 2.5x, and approach deals with caution if ratios exceed 4.0x.

Clearly Acquired’s AI-powered tools can streamline due diligence by analyzing financials, valuations, and operational risks through secure data rooms and automated workflows. This helps buyers avoid overlooking critical issues - important given that earnout disputes occur in 30% to 40% of transactions.

Once due diligence is in place, focus on building a strong capital structure.

Structuring the Capital Stack

As traditional bank lending tightens, diversify your financing options. SBA 7(a) loans are a reliable choice for smaller SMB acquisitions, offering consistent availability even during credit contractions. However, competition for these loans often increases during recessions.

Limit earnouts to 10–15% of the deal value to manage risk and bridge valuation gaps. Revenue-based metrics are usually preferred over EBITDA, as they are harder to manipulate. When acquiring distressed assets, negotiate for escrowed or held-back purchase price amounts to protect against potential successor liabilities.

Clearly Acquired assists buyers in structuring the right capital stack by matching deals with SBA loans, private credit, traditional financing, and seller notes. Its platform uses real underwriting criteria from various financing sources, enabling buyers to act quickly - especially when distressed sales require fast decisions.

Conclusion: Weighing Risks Against Opportunities

Navigating mergers and acquisitions (M&A) during a recession demands a careful balance of risk management and seizing opportunities. History tells us that deals made during and after the 2001–2002 recession delivered three times the excess returns compared to acquisitions made in boom years. However, these successes weren’t just about snagging discounted assets - they came from buyers who refined their investment strategies, enhanced due diligence processes, and structured their financing to minimize risks.

Today’s market calls for a shift in approach. Instead of opportunistic buying, the focus has turned to forming purpose-driven partnerships. Buyers are now prioritizing factors like specialization, geographic expansion, and leadership quality over simply scaling up. This shift distinguishes those who create lasting value from those left holding distressed assets that fail to recover.

Another critical factor in today’s M&A landscape is AI readiness. Companies lacking a clear AI strategy are increasingly seen as risky investments. Buyers who overlook this trend may end up overpaying for businesses ill-equipped to thrive in a post-recession environment.

To bridge the gap between strategic vision and execution, technological tools and expert advisory services play a key role. Platforms like Clearly Acquired’s AI-powered solution help buyers evaluate financial health, identify valuation gaps, and assess operational risks. They also assist in structuring financing options, including SBA 7(a) and 504 loans, private credit, and seller financing. With middle-market deal activity projected to hit a decade-low of just 496 deals by 2025, having the right tools and expertise can make the difference between closing a strong deal and missing out entirely.

Ultimately, success in recession M&A comes down to disciplined analysis and strategic capital planning. Whether you’re targeting discounted distressed assets or acquiring solid businesses during a temporary downturn, the key is to act decisively - without cutting corners on due diligence or financial structure.

FAQs

How do I tell if a recession deal is 'cheap for a reason'?

To figure out if a recession deal is "cheap for a reason", take a close look at the target company’s financial health and how well it aligns with your strategy. A low price might signal potential risks, such as financial trouble, shrinking cash flow, or hidden liabilities. That’s why thorough due diligence is key - dig into financial statements, tax records, and cash flow trends. Determine whether the discount is due to short-term challenges or deeper, structural problems. This way, you can confirm that the price reflects real value and not risks that have been underestimated.

What’s the safest way to finance an SMB acquisition when banks tighten credit?

The best way to navigate this process is by considering alternative financing options such as private equity, seller financing, or structured deal terms. These methods can help you rely less on traditional bank loans, which often come with stricter requirements. On top of that, taking the time for thorough due diligence is critical. It helps identify and address any potential risks, giving you a stronger foundation for a secure and successful acquisition.

What should I check to confirm a business is truly AI-ready before I buy?

Before making a purchase, it's important to confirm that the business has the necessary foundation to support AI. This includes ensuring they have robust data management systems, adequate cloud resources, and the right hardware in place. Take a close look at the quality and relevance of their data assets, as well as the progress and maturity of any existing AI projects. It's also critical to determine if AI is already woven into their daily operations.

Additionally, evaluate whether the team has the required AI expertise to handle these initiatives effectively. Lastly, verify that strong cybersecurity measures are in place to safeguard sensitive information, as this is a key part of any AI-driven environment.