2022 Year End BizBuySell Insight Report

Small Business Acquisitions Up 4.7% in 2022, Sale Prices Dip 3% Amid Inflation and Rate Hikes

  • Small business values impacted by inflation, rate hikes
  • High cost of capital gives buyers leverage in price negotiations
  • Demand continues to favor the service business, and restaurant acquisitions jump
The business-for-sale market grew modestly in 2022, with closed transactions up 4.7% over the previous year, representing a 19% gain since 2020, when many small businesses faced COVID lockdowns, yet still 7% below 2019’s pre-pandemic levels. The first half of the year experienced strong year-over-year gains, but as inflation surged and interest rate hikes took effect, momentum slowed in the second half.

  A total of 9,054 transactions were reported in 2022, compared to 8,647 in 2021.  The year began with a YOY boom in transactions, up 27% in Q1 and 14% in Q2. Transactions then lagged in the second half of 2022, dropping 2% in Q3 and 12.7% in Q4. This is according to BizBuySell’s Insight Report, which tracks and analyzes U.S. business-for-sale transactions and sentiment from business owners, buyers, and brokers.

Financial performance was rocky over the course of 2022. Median revenue dropped 11% in Q3 from Q2 and rose 3% in Q4, finishing 2022 down 2% year-over-year. Median cash flow dropped 3% in Q3 from Q2 and remained flat in Q4, finishing 2022 down 1% year-over-year. Similarly, the average revenue multiple dropped from .67 to .65 and the average cash flow multiples dropped from 2.55 to 2.53.

According to business brokers surveyed, the 2022 market showed increased activity compared to 2021. About a third (33%) closed slightly more deals, while 22% closed significantly more deals. Most brokers (47%) attribute the increase to higher buyer demand for thriving businesses, while 41% believed it was due to an increased number of buyers entering the market.

Sale Prices Dip as Rate Hikes and Inflation Put Pressure on Business Values

Median revenue of businesses sold in 2022 declined 2% to $650,000 compared to $665,107 the previous year, and median cash flow declined 1% to $148,765, compared to $150,000, respectively. Similarly, the average revenue multiple dropped slightly to .65 vs .67 in 2021, and the average cash flow multiple dropped to 2.52 vs 2.55 in 2021.

“Cost of capital became an issue by Q2. The result is decreasing multiples. Sellers are just beginning to comprehend the discounts due to capital costs,” said Terry Gunn of Gunn Business Brokerage in Nashville, TN.

“Rate increases have increased cap rates and are putting downward pressure on valuations. Cost of capital is affecting PE groups while loan rate increases are affecting debt service coverages for main street buyers,” said a broker who chose to be anonymous.

Key Financials of Sold Small Businesses
Median financials of small businesses as reported on BizBuySell.com

While many owners are raising prices to make up the additional costs, others are more worried about losing customers and sales declining. In fact, 74% of owners surveyed say inflation is not easing.

Interest rate hikes are further compounding operations for owners, many who rely on lines of credit to operate are facing rising SBA loan rates. Over 53% of owners said rate hikes are negatively impacting their business.

One owner commented, “The cost of all of my lines of credit (including SBA) are rising significantly. With supply chain issues causing parts/equipment to have longer delivery cycles, I am often caught with things on my line of credit longer while we wait to get and install them.”

In addition to these financial pressures, over 26% of business owners who took out COVID-19 Economic Injury Disaster Loans say they are struggling to repay them.

Rate Hikes May Be Shifting the Market in Favor of Buyers

Given the inflation-induced economic headwinds associated, those looking to buy a business may have the upper hand at the bargaining table. Forty-seven percent (47%) of surveyed brokers feel today’s market has shifted in favor of buyers, while only 17% feel it still favors sellers. The main reason attributed to rate increases.

“Economic uncertainty and changes in financing capacity do seem to be allowing buyers more leverage in approaching transactions,” said an anonymous business broker. While pressures mount on both business values and the rising cost to obtain capital, dealmaking is becoming a challenge for both buyers and sellers. Yet, the burden of flexibility is more likely to fall on the seller. In fact, 59% of buyers surveyed say they believe businesses are overpriced.

“Debt service will be more difficult. Which will drive down the amount buyers are able to pay for businesses. Therefore, I think most business owners will have to either wait to sell or sell for a lower price,” said Mark Kincannon of Resolution Equity Partners in Forth Smith, AR.

Seller Financing is Becoming More Important in Today’s Market

As more sellers come to terms with current market conditions, seller financing is given increased consideration. Of buyers surveyed, 90% feel it is important for owners to offer seller financing. An overwhelming majority of brokers (95%) say it is important in today’s market.

While it may lead to a sale, there are risks involved with seller financing. A seller may find a buyer that is well-suited with industry experience, but short on cash reserves. However, if the business fails, the seller is forced to foreclose.

Demand for Service Businesses Remains Strong, Restaurant Deals Jump 20%

Service businesses accounted for 39% of all acquisitions, with transactions up 7% over the previous year, exceeding 2019’s pre-pandemic levels. The service sector, which includes healthcare, financial, and other essential services, is often considered a low-risk option and highly desirable during economic uncertainty.

Buyers also paid more for service businesses in 2022. The median sale price rose 4% over the previous year to $300,000, which is 33% higher than 2019’s pre-pandemic sale price of $225,000. Prices were backed up by stronger financials, with service businesses showing median revenue up 3% year-over-year and median cash flow up 3.4%, respectively.

Restaurant acquisitions jumped 20% in 2022 following a 6.5% gain in 2021 – after plummeting 38% in 2020. Yet, this uptick is still 21% below 2019’s pre-pandemic levels. Restaurants also sold faster, with median days on the market moving from 176 to 169.

Restaurants showed stronger financials and sold at higher prices. Closed restaurant transactions showed median revenue up 7% and median cash flow up 13% over the previous year. Furthermore, the median sale price rose 14% to $249,000 compared to $220,000 the previous year.

This activity may suggest pent-up demand for restaurant ownership. After nearly two years of struggling to draw in customers, dining out and gathering with friends is becoming popular again.

2023 Business for Sale Market Outlook

The business-for-sale market has been growing over the past year, however, it has also been weighed down by inflation and high-interest rates, neither of which are expected to go away anytime soon. Prices are still accelerating, and more rate hikes are expected.

For buyers, this leaves little incentive to wait it out on the sidelines. As higher rates become more of a reality, many buyers will adjust their strategy and continue seeking out great opportunities, with most anticipating better rates in 2024 and the ability to refinance.

While current economic conditions are worth considering, buyers should continue being on the lookout for good opportunities. Moreover, the possibility of a recession may drive more sellers, including older Baby Boomers, to the marketplace.

Currently, 45% of owners say they are selling to retire. Furthermore, over 42% say we are already in a recession (vs 48% of buyers), while 33% of both owners and buyers believe we’ll enter one in 2023.

“Many more Baby Boomer Sellers are available to exit businesses and sell. At least 50% of my current Sellers are family-operated businesses where the owner, a Baby Boomer, is looking to retire or exit,” said Mark Mueller of CRE Resources, LLC in New Jersey.

For sellers, businesses with strong financials are expected to continue being in high demand. This may be especially true for service businesses, fast-food restaurants, and other ‘recession-proof’ businesses. Yet, higher rates may force some sellers to adjust prices and consider seller financing.

It’s also important to remember that a typical sale can take 6 months to 1 year to complete. Those with a transition on the not-so-immediate horizon should still take care to begin preparing for their exit now, so they are ready to strike when the iron is hot. With that said, just 53% of surveyed owners said they had an exit plan, and a slightly higher 58% knew what their business is worth. That leaves nearly one out of every two owners unprepared should disaster strike instead.

While retirement is the top reason business owners intend to sell, the “ Dismal D’s” are unfortunately very common reasons pushing owners, or their families, to market. It only takes a few minutes to call a local business broker now and save months to years of stress later. Many brokers offer free consultations, valuations, and other services to empower business owners with the tools for a future, profitable exit.