16% fewer jobs added to US economy in 2011 due to fewer small businesses changing hands

BizBuySell
February 6, 2012

A BizBuySell report on small business investment and hiring shows business succession has economic ripple effect on U.S. economy akin to that of real estate market turnover

San Francisco, CA - February 6, 2012 -- A newly published study by BizBuySell, the Internet's largest business-for-sale marketplace, has shown that a sluggish business succession market, the buying and selling of small to medium-sized businesses, hindered 2011 national full-time employment by 308,000 jobs.

Historically, economists have looked at real estate turnover as one measure of growth and economic activity. Investment before, during and after a real estate sale stimulates consumer spending, hiring and liquidity in capital markets.

According to research conducted by BizBuySell, including an extensive survey of business buyers and sellers in January 2012, the business succession market has similar secondary and tertiary economic impacts. Survey responses indicated that, on average, the sale of a small business to a new owner leads to net job creation of 1.3 full-time positions and $37,000 in additional investment during the first 12 months following the sale. The additional investment is driven by both improvements to ready the business for sale and improvements undertaken by the new owner.

"Small to medium-sized business transactions often represent substantial investment on the part of the owner and buyer, and are often of similar scale as real estate deals," Mike Handelsman, group general manager of BizBuySell.com and BizQuest.com, said. "With that in mind, this study shows that a healthy business succession market is a powerful force for economic stimulus."

Prior to the recession, businesses changed hands much more quickly than they do now. For example, during the second quarter of 2008, BizBuySell reported 2,978 small business sales. For that same quarter in 2011, BizBuySell reported 1,701 - 43 percent fewer. While recent results are stronger than those during the depth of the recession, they are still far off peak levels, resulting in much less economic stimulus. The net impact to the U.S. economy of fewer small businesses changing hands is 308,000 fewer full-time jobs and $11.5 billion in lost investment and consumer spending.

To put this in context, given that the US economy added 1.9 million jobs in 2011, if business succession had remained at 2008 levels the economy would have added 16 percent more full-time positions.

A Vicious Cycle

These findings highlight the importance of free flowing capital. The most common explanation given for a slow business succession market is difficulty in securing financing. Without easy access to capital, potential investors are excluded from the market, leading to reduced investment, hiring and consumer spending. This, in turn, further freezes capital due to anemic demand. To help stimulate this part of the economy, banks and lending institutions must break the cycle and be more willing to offer additional financing. Ideally, new financing will include more SBA-backed loans, further spurring confidence in those interested in buying businesses.

Less business succession means less investment and consumer spending

The $11.5 billion gap in investment and consumer spending is a result of fewer business improvement expenditures and a drop in overall household income due to reduced employment.

Before and after each small business transaction, both seller and buyer make substantial investments in the business, spending an average of $12,500 and $24,500, respectively. With fewer business changing hands, $8 billion less was invested in the U.S. economy for these purposes.

The struggling succession market also affected consumer spending. Full-time employment leads to an average increase of $10,000 in spending for each household, thanks to additional discretionary income. 43 percent fewer business transactions meant 308,000 fewer jobs and therefore $3.1 billion less in consumer spending.

Interesting Survey Responses

In addition to the overall conclusions, a few other interesting facts were revealed by BizBuySell's research:

  • 54 percent of surveyed new business owners fire no one in the first year.
  • 15 percent of business owners spend $40,000 or more to ready their business for sale.
  • 7.93 months is the average time required to sell a small business.

Media Contact:

Bobby Chilver
Walker Sands Communications
office: (312) 546-4712
email: robert.chilver@walkersands.com

About BizBuySell

BizBuySell is the Internet's largest business for sale marketplace. Since 1996, BizBuySell has offered tools that make it easy for business owners and brokers to sell a business, and potential buyers to find the business of their dreams. BizBuySell currently has an inventory of approximately businesses - spanning 80 countries - for sale at any one time and receives more than monthly visits. The site also features an extensive franchise directory as well as an easy-to-use business valuation tool. Please visit www.bizbuysell.com for more information.

BizBuySell was founded in 1996 and in 2012 became a division of CoStar Group, Inc. (NASDAQ - CSGP) - commercial real estate's leading provider of information and analytic services. CoStar conducts expansive, ongoing research to produce and maintain the largest and most comprehensive database of commercial real estate information and offers a suite of online services enabling clients to analyze, interpret and gain unmatched insight on commercial property values, market conditions and current availabilities. For more information, visit www.costar.com.


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