Q3 2021 BizBuySell Insight Report

• Sale prices jump 17% as buyers choose stability over value
• Rising owner confidence reflects flip back to sellers’ market
• Labor shortages and supply chain disruptions continue to slow recovery
• Corporate refugees fuel record buyer demand for entrepreneurship
• Market supply expected to grow as more Baby Boomers retire
• Pandemic forces permanent shift “online” for most business owners

The number of businesses being bought and sold continued to rebound, with closed transactions in the third quarter up 17% over the previous quarter, and 11% year-over-year, according to BizBuySell’s Insight Report, which tracks and analyzes U.S. business-for-sale transactions. The report also analyzes survey responses from roughly 2,400 business owners, buyers, and brokers.

Sellers are returning to the market, feeling more confident they can receive a good price and less willing to wait as the pandemic lingers on. Seller confidence climbed to 57, up from 45 in 2020, which is the highest mark since 2018’s high of 58. Of those surveyed, 49% believe they could receive a higher sale price today compared to a year ago, with 46% saying the top factor being improved sales/revenue.

The median revenue of businesses sold in the third quarter was $671,713, up 6% year-over-year. Meanwhile, buyers are paying record-high prices for businesses that have continued to perform well during the pandemic. The median sale price in the third quarter hit a new high of $349,500, 17% above the previous year and 40% above 2019’s Q3 pre-pandemic levels.

With a limited supply of profitable businesses and regret over missing last year’s lower prices, buyer confidence fell to 48, significantly down from 60 in 2020 and slightly above the 47 scored in 2018.

Moreover, demand for high performing businesses is heating up. BizBuySell’s traffic has grown 29% since this same time in 2019. Yet, as many owners remain focused on recovery, supply is still limited – the perfect storm for a sellers’ market.

“There are still fewer sellers on the market than there otherwise would have been due to COVID and post-COVID challenges. However, we signed up more clients in Q3 than any other quarter and I feel strongly that burned out sellers are going to be coming out to market more robustly in 2022,” said Max Friar of Calder Capital, LLC.

Owners Face Ongoing Labor Shortages and Rising Costs as Consumer Spending Picks Up

With COVID infection rates dropping and students back in school, retail sales are picking up. According to the U.S. Census Bureau, retail spending in September increased 13.9% over the previous year. However, many businesses still struggle to attract or retain employees. In fact, 49% of owners say the labor shortage is impacting their business, while business brokers see it as the number one concern facing small businesses.

According to Charles Spickert, CBI of Touchstone Business Advisors, the labor shortages are at the foundation of other prominent issues facing small businesses. “Labor shortages seem to be affecting every sector, which in turn cause rising costs (of labor) and supply chain disruptions,” said Spickert.

Despite shipment delays and rising costs for material and labor, 47% of small business owners surveyed said their business is performing better than in 2020. Median revenue for businesses sold in the third quarter increased 12% over the previous quarter and 6% year-over-year.

Owners Combat Operational Challenges with Shift to Enhanced Digital Efficiencies

Since the pandemic began, 50% of surveyed small business owners have pivoted to a more digital environment, through serving customers virtually, online ordering, and delivery apps. As the pandemic and its impact shifts toward our rearview mirror, 76% of owners say they consider the digital changes they’ve made permanent.

“Many of today’s businesses are emerging with a stronger, more modern business model that’s attracting today’s buyer. My people tell me they never want to go back to paper. It has made us more efficient, profitable, and made our employees and customers happier.” according to M.G., a business owner in Washington.

Not only is this digital shift improving efficiencies and profitability, but it’s also making those businesses more valuable to potential acquirers. Sixty-four percent (64%) of buyers say it’s important for a business to have a strong online footprint in their buying decision, over half saying extremely important.

For some buyers, however, those businesses excelling without a digital presence could present an opportunity for easy upside. “If the business is already profitable without a website, I see this as a nice value-add opportunity following acquisition,” said a buyer named Ben in Alaska.

Today’s Buyers: Corporate Refugees and Serial Entrepreneurs Seeking Stability

Despite the pandemic’s economic upheaval, the U.S. Census Bureau reported a boom in entrepreneurial activity. A record number of applications to start new businesses were received in both 2020 and the first half of 2021. An increased interest in business ownership is also reflected in BizBuySell’s record high traffic now compared to before the pandemic.

As the pandemic reshaped the economy, including reshuffling how we work and spend money, it opened new opportunities for those seeking business ownership, including corporate refugees who have either lost their jobs or were forced into retirement.

Forty-four percent (44%) of surveyed business buyers identify as wanting to leave their current job to be more in control of their future, with an additional 13% being newly unemployed. As further support, surveyed business brokers named corporate refugees seeking financial freedom as the top-ranked segment to describe today’s business buyers, followed by serial entrepreneurs.

When it comes to making a purchase decision, the ideal opportunity for buyers presents both stability and value. If having to choose, 42% of brokers say buyers are focused on stability versus 13% saying value.

“In my experience, buyers of businesses on Main Street or the lower middle market prefer stable companies. If a company is declining, they do not want to ‘catch a falling knife’ and if a company is surging, they are often deterred by the seller’s increasing valuation expectations as well as concern that exponential growth may be short-lived and unsustainable,” said Friar

This underlines buyers’ concerns over purchasing businesses that have not performed well during the pandemic. The desire for stability also explains why the resilient service sector is so popular in today’s market. In addition to making up 42% of second-quarter transactions, 1 out of 3 surveyed buyers indicated a desire to purchase a business in the service sector.

“Businesses that provide ‘essential’ services are more likely to withstand economic downturns and pandemics. Consequently, they are more attractive to buyers than most other types of businesses,” said Tony Torella of Excelsior Business Group, LLC.

Small Business Market Outlook

Despite economic ups and downs brought on by the ongoing pandemic, the business for sale market continues to rebound. As more businesses recover their losses and show improved financials, more sellers are expected to return to the market.

In fact, twenty-eight percent (28%) of owners surveyed said they plan to sell in the coming year, either due to retirement (52%) or burnout (38%). Plus, 41% of these owners identify as Baby Boomers.

With businesses selling at record-high prices, owners of strong performing businesses could see today’s market as an opportunity to exit at a high point. This is especially true for those burnt out by pandemic-related challenges or seeing a window open for retirement.

For any owner considering taking advantage of these conditions, Jason Ward of TruView Business Advisors offers the following advice, “We are starting to see an uptick in sellers ready to take their business to the market. We are advising our clients who are considering selling in 2022 to start the process as soon as possible to get in before the market is saturated with inventory.”

With more sellers expected to enter the market, buyers can expect to find a healthier supply of strong performing businesses. Moreover, buyers can and still take advantage of relatively affordable financing. These conditions should present opportunities for entrepreneurs on both sides looking to make a change.

Q3 2021 Small Business Values

The $349,500 median sale prices continue a trend of new highs, up 9% from last quarter. Restaurant prices maintained the healthy gains achieved in the second quarter, while service and retail business prices accelerated 20% and 7% respectively. With many businesses having recovered from peak pandemic losses, today’s market presents an opportune time for owners to exit. That being said, it’s also presented a challenging dynamic for business valuations, where the last 18 months resemble a roller coaster on the income statement.

Fifty-two (52%) of brokers surveyed recommend using a blend of pre-pandemic and current financials to value businesses depressed by the pandemic yet since recovered. Twenty-six (26%) say to use current (recovered) financials, with 13% recommending pre-pandemic financials.

Q3 2021 Small Business Financial Health

After experiencing a dip last quarter, the median revenue and cash flow of sold businesses increased 12% and 7% respectively versus the prior quarter and up 6% and 11% compared to a year ago. Digging deeper, however, it’s clear that increasing costs associated with supplies and labor are still having a very meaningful impact.

Looking at cash flow by sector specifically, positive quarter-over-quarter gains reflect strong 15% growth in the service sector offsetting declines in every other industry. Based on this, it’s no surprise service businesses were selected as the most popular acquisition in today’s market by surveyed brokers.

Manufacturing companies saw the largest quarter-over-quarter median cash flow decline, down 11%, followed by retail (9%) and restaurants (4%). In fact, the median cash flow of sold manufacturing businesses is now down 26% compared to businesses sold in the 1st quarter, with retail down 14%. As result, associated median sale prices have declined 27% and 5% over the same period, respectively, these two sectors being the most heavily impacted by supply chain disruptions.

George Rosen of Contango Investments, Inc. explains, “Manufacturing and construction jobs are getting pushed back due to supply constraints. Revenue is getting pushed back two to six months.” Friar adds, “When businesses can’t get parts or components, they can’t complete or ship products. So lead times are ridiculously long not only in manufacturing but also in construction, home furnishings, you name it.”

Q3 2021 by Deal Size

Nineteen percent of transactions sold for a price of $1 million or higher during Q3 2021, the same number as the prior quarter. These businesses had a median cash flow of $500,000 and were on the market for 178 days, compared to $150,251 and 167 respectively for all businesses. The 178 median days on market is a slight increase from 168 days in Q2, breaking a streak of 3 consecutive quarters with shorter sale time frames for these higher-value businesses.

In addition, businesses selling for $1 million or higher averaged a .93 revenue multiple and 3.67 cash flow multiple, in line with last quarter and significantly higher than the .67 and 2.59 multiples, respectively, for all businesses. Lastly, most of these larger acquisitions occurred in the service industry (43%), followed by retail (16%), manufacturing (12%), and restaurant (4%) sectors. The sector breakdown follows the same trend seen last quarter.