U.S. Economic Growth and Small Business Valuations
With the third quarter earnings season in full swing, investors from Main Street to Wall Street are paying close attention to the Commerce Department's report this week showing a 4.9% annual growth rate of the gross domestic product. Buoyed by a strong labor market and cooling inflation, consumer confidence surged this past summer. However, in the midst of ongoing economic uncertainty, business owners and entrepreneurs remain optimistic and see opportunities on the horizon. With the country’s efforts to avoid a recession, small business owners and aspiring entrepreneurs are capitalizing on the opportunities presented by the current economic landscape, where business valuations are reflecting both the positive impact of increased revenues and the challenges posed by economic uncertainty and higher interest rates.
The Levers Impacting Business Valuation
BizBuySell’s most recent quarterly Insight Report, which tracks and analyzes U.S. business-for-sale transactions and sentiment from surveys of business owners, buyers, and business brokers, finds the market adapting to a high-interest rate environment. Small business acquisitions grew 2% year-over-year, and 2,281 businesses were reported sold in the third quarter of 2023. According to the Small Business Confidence Survey, 55% of business owners believe they will receive a price that meets their expectations if they were to sell their business today. However, 44% are less optimistic about their chances. Business valuations are rising and falling, depending on a variety of factors, including industry, location, and market trends.
Factors Boosting Business Valuation
According to the Small Business Confidence Survey, almost half (49.13%) of business owners attribute improving sales/revenue as the primary factor in increasing business values. This, combined with the Commerce Department’s report of 4.9% annual GDP growth, shows that consumers are engaged and continue to spend. The Federal Reserve’s decision to increase interest rates has had a cooling effect on inflation, contributing to a strong labor market. With low unemployment rates, consumer confidence remains resilient.
Factors Weakening Business Valuations
According to BizBuySell, economic uncertainty is cited by nearly 37% of business owners as the biggest factor reducing business value. While the labor market overall remains strong, small business owners continue to find it challenging to attract and retain talent. And with conflict in the Middle East creating volatility in the oil market, supply chain issues and increasing costs are also a concern of uncertainty for small business owners. 29% of respondents report higher interest rates are negatively impacting their business value. Higher interest rates mean that borrowing money can become more expensive for many business owners as well as for prospective buyers.
Resilient Business-for-Sale Marketplace
The current business-for-sale marketplace presents opportunities amidst economic uncertainty and the challenge of rising interest rates for business owners and entrepreneurs. The expansion in GDP over the summer indicates a robust and resilient economy. With increased consumer spending and growth opportunities, 39% of buyers perceive today's economic landscape as a window of opportunity to venture into different businesses and leverage the ones baby boomers established as they retire. In the face of economic uncertainty and higher interest rates, many investors may choose to divest from more volatile assets and shift their focus towards investing in businesses, recognizing them as tangible investments that can yield significant returns.
For small businesses owners looking to exit their business in the next year, or beyond, the first step is to understand the value of your business. And understanding how the economy impacts the value of a business is essential. To learn more about trends in the business-for-sale marketplace, check out the latest Insight Report. Armed with the latest economic data, you’ll be able to determine the right time to buy or sell a business.