Business for Sale Market Rebounds in Q1 2023 After Year-End Declines Amid Rate Hikes and Inflation
- Closed Transactions Bounce 4.8%, Sale Prices 11%, After Losses in Fourth Quarter
- Nearly One-Third of Owners Speeding Up Exit Timelines Amid Economic Uncertainty
- Buyers Gain Leverage in Price Negotiations with Higher Acquisition Costs
Furthermore, businesses sold in Q1 2023 reported higher financials. Median revenue rose 6.7% over the previous year and median cash flow rose 2.8% respectively, reaching their highest levels on record, indicating consumer spend patterns are adapting to inflation. This also points to buyer demand for businesses that continue to perform well.
Online activity is also picking up as buyers continue to seek out opportunities. BizBuySell’s online marketplace of active listings shows a noticeable increase in online traffic, with the number of monthly visits up 27% over the previous year.
Business Buyers Gain Leverage as High Acquisition Costs Put Pressure on Business Values
According to business brokers who were recently surveyed, most believe the market favors buyers (42%) while nearly a third (29%) feel it is balanced and 17% believe it favors sellers. Interest rates likely play a strong role in these dynamics.
Moreover, many buyers see today’s current economic conditions as an opportunity. According to BizBuySell’s recent Small Business Survey, 38% of buyers currently believe they can get good value at a favorable price. Sellers, especially those wanting to secure a nest egg for their retirement, may be more open to negotiating price rather than hold off and risk being in a weaker position.
Strejeck also believes the market has shifted in favor of buyers, adding “In my opinion, I believe it’s slightly towards the buyer side. Rates are going up on the SBA side as well as commercial real estate rates. These two factors are having an impact on cash flow numbers for a prospective buyer.”
“Buyers appear to have the upper hand in any market where funding becomes less available and more expensive. Additionally, given US demographics, there is a shift underway to more owners 55+ are or will be selling their business entities,” says Stephen LaRoche of LaRoche Consulting/LaRoche Holdings LLC.
With buyers facing higher acquisition costs, asking prices seem less reasonable. In fact, 42% of buyers say the high cost of capital has delayed their purchase timeline. In terms of non-cash buyers, this limits the number of opportunities they would otherwise be able to afford.
Nearly One-Third of Business Owners Speeding Up Their Exit Due to Retirement and Burnout
After pivoting through a pandemic and associated economic disruptions, nearly a third (28%) of business owners say they are speeding up their exit timelines. While 44% say retirement is motivating them to sell, 30% say they are burnt out and 21% point to economic uncertainty.
Diane Hartz Warsoff, CEO of Transworld Business Advisors of Utah County, Utah also expects more sellers to enter the market adding, “I think that a lot of business owners who were waiting to recover from COVID issues finally feel that they will get a better price for their businesses based on 2022 performance.”
When asked which specific macro-economic conditions were impacting their exit timeline, business owners cited both inflation and recession as the top concerns (both 50%), followed by rising interest rates 46%, financial concerns 42% and hiring challenges 35%.
“Owners are now actively selling due to retirement, stabilization of revenue after COVID, high labor cost, hard time keeping employees, increased interest and debt service on their SBA loan, and not being able to grow revenue to before COVID level,” says Mike Zarinbaksh of Sunbelt Business Advisors in Maryland.
Many business owners believe the economy is already slowing down. Over 40% believe we are already in a recession while 36% believe we will enter one this year. Rather than wait for conditions to improve, or even worsen, many are preferring to exit now.
Business Owners Say Inflation Remains Challenging, Rate Hikes and Labor Market Impacting Profitability
Inflation is gradually beginning to cool. The consumer price index rose 5% in March, which was the smallest year-over-year increase since May 2021. Plus, egg prices dropped 10%.
Yet small businesses are still feeling challenged, with 73% of owners saying inflation is not easing. This is especially true for restaurants. March food prices rose 8.5% year-over-year, while the cost of eating away from home rose 8.8% over that same period.
Fortunately, restaurants, particularly quick-serve and fast casual, seem to have an easier time passing along higher costs.
“I sell restaurants and consumers accept menu and food price increases as they know restaurateurs generally don’t increase prices unless they have to,” explains Martin Cramer of Restaurant Realty Company in California.
High interest rates are also challenging small businesses, with nearly 60% of owners say their business has been negatively impacted. Not only are they facing higher loan payments, but in some sectors, customers are discouraged from borrowing to finance their purchases, thus impacting sales.
Furthermore, small businesses are still having trouble hiring qualified workers. In fact, over 65% of owners say labor costs are impacting profitability. Over half (56%) of those looking to hire say they are having difficulty due to lack of applicants, while 26% say it is due to payroll costs.
Yet, after the Fed’s year-long campaign of rate hikes, both the labor market and inflation are showing signs of cooling. According to the March jobs report, US employers added just 236,000 jobs, coming in below expectations, and the unemployment rate dropped 3.5%.
Lastly, nearly half of business owners (49%) say supply chain issues are easing. While prices of goods are still elevated, availability and delivery timelines have improved over the past year.
Sellers Financing Plays a Bigger Role in Today’s Market
As high interest rates continue to raise acquisition costs, sellers need to consider their best option for arriving at a favorable price. Over 70% of business brokers surveyed feel seller financing is important in today’s market.
“Seller financing could be the difference in whether or not a deal is to be made. As stated prior, interest rates are not favorable for buyers right now, and seller financing could be more attractive for a buyer if the terms can beat out a banks proposed rates,” says Madison Dang of Elite Business Investments Corp in California.
Furthermore, seller financing is important to attract qualified buyers. While 40% of owners say they do not expect to offer seller financing, they can expect much longer timeline; the majority (66%) of buyers say they plan to ask for seller financing in their purchase.
LaRoche adds, “Seller financing at slightly lower than market rates could make a huge difference in both selling price as well as sway buyers when considering multiple acquisition opportunities.”
Higher Value Business Deals on the Market for Longer
Businesses with a selling price of $1 million or higher during Q1 2023 had a median cash flow of $560,473 and were on the market for 211 days, compared to $125,348 and 176 respectively for those businesses with a deal size under $1 million. The 211 median days on market is a slight increase from 200 days in Q4, continuing a streak of 3 consecutive quarters with longer sale time frames for these higher value businesses.
In addition, businesses selling for $1 million or higher averaged a .90 revenue multiple and 3.55 cash flow multiple, significantly higher than the .57 and 2.25 multiples, respectively, for smaller transactions. Lastly, most of these larger acquisitions occurred in the service industry (46%), followed by retail (15%), manufacturing (12%) and restaurant (8%) sectors.
Market Outlook
Moving forward into the Spring and Summer of 2023, the small business market is expected to continue facing challenges stemming from inflation and higher interest rates, while the labor market is expected to ease somewhat. However, the recent uptick in Q1 2023 activity is a first step toward the market adjusting to current economic conditions.
Toni Dooley of Royal Business Consultants in New York states, “I think high rates will continue although not much further from here. We will see some good business come on the market as sellers would like to get ahead of any potential recession that will harm their profits and negatively affect valuation. If we do go more into a recession and unemployment goes up, this will help the supply of buyers who are looking to build equity and want to transition from the corporate world.”
In addition, there are a few safe havens for generating a positive return in today’s market and thriving or even consistent businesses may be one of those few.
“They have fewer options of where to put their money to work. The stock market is in shambles; real estate is risky depending on location; the speculative crypto market is in the toilet. Buying a business and putting one’s effort into it, seems like the safest bet to many,” said Guillermo A Birmingham of Transworld Business Advisors of Richmond, Virginia.
Buyers Motivated by Emerging Opportunities, Seek Stability and Profitability
Demand is expected to remain strong as buyers continue seeking out new opportunities while adjusting to higher interest rates. Furthermore, as the labor market softens, the pool of buyers is also expected to include an influx of corporate refugees seeking business ownership.
“Given the stock market uncertainty and volatility, I expect that some investors may shift their focus to acquisition mode. This, combined with a gradual acceptance of the new interest rate norm should allow for slightly increased buyer activity as we progress through 2023,” LaRoche comments.
While high interest rates have presented challenges, 38% of buyers believe they can still get a good value at a favorable price. However, (45%) are motivated because they want to leave the corporate world and be in control of their future. Most buyers (48%) said they preferred stable, recession-resistant businesses.
Warsoff adds, “With some uncertainties in the economy – rising interest rates and threats of a recession – they want to take more control over their working lives by becoming business owners. We are also seeing more buyers who are looking to diversify their income streams by purchasing a business, in addition to their current employment.”
Rather than wait for conditions to improve, 30% of buyers expect to find unique opportunities. In fact, many expect there are a multitude of business owners looking to retire who either don’t have children to take over the business or have children that aren’t interested.
More Aging Baby Boomers Expected to Fuel the Market with Available Businesses
Supply of available businesses is expected to grow through the year as more aging Baby Boomers step off the sidelines and enter the market. For many, after weathering through the pandemic, this is their window of opportunity to find a buyer and still receive a favorable price. However, carrying some portion of the financing may be their best option to achieve their goals.
Dang comments, “I expect to see more inventory hit the market somewhere around the end of Q2 to beginning of Q3. It all depends on how lending will be. There are plenty of buyers out there and they will not be going anywhere. Our hopes are, that sellers see that buyers are motivated and ready to underwrite a deal at any given moment.”
Strejeck expects sellers to be more flexible as the year progresses and adds, “I am optimistic for 2023. Overall, the activity has been steady, and I believe that sellers are more realistic as to price points to sell their business as well as steps necessary to help get the deal done.”