My personal opinions aside regarding the poor service BizBuySell generally provides to buyers, sellers, and brokers, their "Insight Report" often offers valuable information for the business-for-sale marketplace. The key takeaways from their 4th quarter 2022 Insight Report are (Eric Gall's comments in red italic text):
Buyers and Sellers Remain Active
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.
The Feds last Interest Rate Hike Slowed 4Q Sales as Buyers and Sellers are Adjusting to the New Norm
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. -- I would expect sales to return to normal levels as 2022 financials are completed and Seller's expectations regarding pricing are adjusted to account for Buyers' increased debt burden due to higher interest rates.
A Fourth Quarter Bounce-Back in Revenues Indicates Returning Economic Steam in 2022
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.
Brokers Are Being Viewed as a Valuable Resource as Participating in Deals is Increasing
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.
Interest Rate Hikes are Putting Downward Pressure on Sales Multiples / Prices
As the number of closed deals continued ticking upward in 2022, the median sale price dropped 3% to $315,000. While buyers are still on the lookout for good businesses that justify the higher cost of capital, sellers are feeling the impact of inflation and rising interest rates on business values.
The 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.
Seller Financing is Becoming a More Important Element of Deal Structure
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.
Service Business Demand Remains Strong - Healthcare, Restaurants, HVAC, etc.
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.
What Goes Up, Must Come Down - Buyers Should Benefit by Buying Now
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.
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.
For the Full Report, Click HERE.
Contact Eric J. Gall at 239.738.6227 or [email protected] to discuss your plan for 2023 and beyond.