2018 Breaks Record for Small Businesses Bought and Sold, Retiring Baby Boomers Continue to Fuel Market as Buyers Eagerly Exit Corporate World
For the third year in a row, a record number of small businesses changed hands, according to the latest BizBuySell Insight Report, a nationally-recognized economic indicator which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide. A total of 10,312 businesses were reported sold in 2018, the most since BizBuySell start collecting such data in 2007. The year's brisk activity of businesses being sold represents a four percent increase over the previous record of 9,919 in 2017 and a 31 percent jump from 2016's then high of 7,842.
In addition to the reported sale data, BizBuySell also separately surveyed business brokers and small business owners about the market. Brokers said they saw similar increases, with 65 percent of respondents reporting that their transaction activity increased in 2018 while another 21 percent said it remained similar to 2017's active level. When asked why they believed the business-for-sale market has remained so hot, brokers credited an increasing number of buyers & sellers and the general improvement of the small business environment. Similarly, current small business owners credited the same factors as the reason for transaction growth.
"I think our society as a whole has put more emphasis on small businesses and has made the pathway to business ownership easier to see for first-time entrepreneurs, which is great as the market continues to perform well," said one surveyed owner.
When asked why more listings were hitting the market in 2018, exactly half of current owners cited the growing Baby Boomer population that is now ready to retire. Another 34 percent believed owners did not want to manage rising minimum wage and health care costs while 32 percent said owners are motivated to sell based on concerns over upcoming economic or political regulations.
On the other hand, buyers also remain eager to try their hand at small business ownership. Current owners believe most of these prospective buyers are coming from the corporate world, with an overwhelming 59 percent crediting the increased buyer numbers to people looking to escape a 9-5 job.
"The strong economy is giving people confidence to be their own boss, and move away from working for others," another owner said.
Other reasons included buyer confidence that the economy will remain strong and their greater access to capital due to increased personal assets.
"The business-for-sale market has remained balanced for quite a few years now, allowing both buyers and sellers to confidently enter the market and walk away with a deal to their liking," Bob House, President of BizBuySell.com & BizQuest.com, said. "Small business ownership is the American dream and with a growing number of listings hitting the market, there should remain a steady stream of entrepreneurs ready to take over these businesses."
2018 Small Business Financial Health
Not only did more small businesses change hands in 2018, those businesses were also financially healthier than in previous years. The median revenue of a sold business grew 6.3 percent this year, from $500,000 in 2017 to $531,653 in 2018. Similarly, the median cash flow increased 4.3 percent, from $115,000 the year prior to $120,000. Both numbers represent the highest financial performance of sold businesses since BizBuySell began tracking this data.
Current owners BizBuySell surveyed saw a similar financial success. Nearly half (49 percent) said their business performed better in 2018 than in 2017. Another 36 percent had similar numbers and just 11 percent said they had a worse year. When asked why they believe 2018 was so successful for small businesses, 49 percent credited today's economic conditions while others noted consumer confidence (22 percent) and improved management practices (7 percent).
2018 Small Business Values
As the financial performance of small businesses grows, so does the value of these businesses on the open market. Because of this, owners were able to ask for and receive more for their businesses in 2018. The median asking price for a small business in the U.S. was $275,000, a 10 percent increase from 2017. The result was a median sale price of $249,000 for all closed transactions in 2018, a 9.3 percent increase from $227,880 in 2017.
The fact that transactions have stayed so strong while asking prices have risen shows that buyers are more than willing to pay more for a financially strong business with a bright future. In fact, BizBuySell surveyed buyers who had purchased a small business within the last year and 40 percent believed it was accurately priced. Thirty-one (31) percent said the business was overpriced but they believed the purchase was still worth it, while 15 percent thought they got a deal and the business was actually underpriced.
Business brokers see these higher sale prices continuing in 2019. In fact, 37 percent of brokers said they expect small business sale prices to increase next year, with another 49 percent believing prices will remain consistent with 2018's historically high levels.
2018 Industry Breakdown
With a record number of businesses changing hands, it was interesting to find that sectors like franchise businesses and retail stores were most popular amongst buyers, while interest in other popular categories like restaurants took a step back.
Reported transactions of established franchise locations grew 27 percent in 2018 following similarly strong growth last year, indicating buyers are still enthusiastic about buying franchise businesses with an established track record and brand name. At the same time, median sale price of franchises grew 2.7 percent, from $225,000 last year to $231,000. Average multiple of cash flow grew at a faster rate for franchises than businesses overall - 5.4 percent compared to 0.8 percent. 2018 also saw a 10 percent higher cash flow multiple paid for franchises (2.56 for franchises compared to 2.35 overall), which may reflect a premium provided by franchise branding.
Within retail overall, businesses saw a 20 percent increase in closed transactions despite smaller financial numbers while restaurants had a 14 percent drop in transactions despite growing financials as compared to 2017. The median revenue of retail businesses sold in 2018 declined 9.6 percent year-over-year and median cash flow was flat. The smaller financials come at a time most retailers are faced with increasing challenges, like Amazon, to their business. It could also indicate buyers' interest in finding smaller businesses that are less likely to compete with those large retailers. On the opposite end, restaurant median revenue and cash flow increased by 15.3 and 6.6 percent respectively, showing that even while less restaurants are changing hands, those that are available show healthy financials.
Manufacturing businesses continued to perform steadily, with closed transactions slightly increasing 1.3 percent, but more notably, median sale prices grew by 22.9 percent.
For a full breakdown of data by industry, click here.
2018's Top Performing Markets
By closed transactions, Washington D.C.’s activity grew by 54 percent, the highest among cities with a minimum of 50 transactions in 2018. Baltimore was second with a 42 percent growth rate and Jacksonville third with a 36 percent increase in transactions. Other notable increases in sold businesses include Detroit (up 31 percent) and Nashville (up 30 percent). Those that saw a drop in closed transactions this year were major cities like Boston (down 22 percent), Chicago (down 15 percent), Atlanta (down 11 percent), New York (down 10 percent) and L.A. (down 10 percent).
Salt Lake City owners earned the most cash for their efforts, with the highest median sale price among major cities (minimum 50 transaction) at $600,000. The Charlotte metropolitan area followed at $449,600 and Seattle area owners earned a median sale price of $400,000. Breaking down by region, the Midwest had the highest annual median sale price of $305,000, making a 17.3% jump from $260,000 last year.
"I speak with a myriad of people in a variety of geographical areas. Regardless of the region people feel positively about the nature of their local economies as well as the national economy," one small business owner noted.
For a full breakdown of the top U.S. markets, click here.
2018 Differences by Deal Size
When breaking 2018 closed transactions down by deal size, a few noteworthy differences exist between businesses that sold for $1 million or more when compared to all business sales. BizBuySell had 1,098 reported sales that exceeded this sale price threshold in 2018. Not surprisingly, these businesses have larger revenues and cash flows which help them command higher prices in the market.
By industry, deals over $1 million are three times more likely to be manufacturing-focused, with these representing 12 percent of all deals over the threshold (compared to 4 percent for businesses overall). Service businesses remain the most common industry represented in deals over $1 million (37 percent) as well as overall numbers (38 percent), while restaurant sales less frequently reached this high (8 percent over $1 million compared to 21 percent of all sales).
Deals over $1 million are also more likely to close nearer to the initial asking price. The national asking price to sale price ratio typically sits around 92%. However at the $1 million level, owners are receiving 96% of asking price. Interestingly, there was little difference in average days on the market for each group with both taking between 175-180 median days to sell.
Perhaps most importantly, these larger deals command higher valuations via larger revenue and cash flow multiples. The average revenue multiple of all businesses sits at .60 but jumps to .94 for businesses sold over $1 million. Similarly, the average cash flow multiple grows from 2.35 overall to 3.89 at the $1 million threshold. Larger deals command a premium for the profits they generate.
Q4 2018 Overview
Looking at the fourth quarter of 2018, transaction activity took a small six percent drop from the same time last year. The fourth quarter is typically the softest of the year, but the first three quarters remained strong enough to set the record-breaking mark for full-year transactions.
Financially, the median sale price of a business sold in Q4 remained steady, holding at $230,000, as it was last year. Median revenue of those businesses grew 3.9 percent to $519,287 and median cash flow increased 6.1 percent to $119,382.
In terms of the supply pipeline, the fourth quarter of 2018 saw an increase of active business-for-sale listings of 13.3 percent over Q4 of 2017 showing there remains a strong supply of available businesses for interested buyers to purchase in 2019. In addition, the median revenue of these listed businesses grew 4 percent and the cash flow 6.3 percent from the same time last year, highlighting a larger and financially healthier market of business opportunities.
Business brokers expect the listing totals to continue on this growth trend driven by more Baby Boomers ready to retire. Specifically, close to 80 percent of surveyed brokers believe more Baby Boomers will look to sell their business in 2019 than did in 2018.
With transaction activity and small business performance at such strong levels, it is no surprise that both business brokers and current owners are optimistic for the future.
Almost 70 percent of business brokers said they expect even more transactions to take place in 2019 than did in the record breaking 2018. When asked why they expect more activity, brokers said they expect the number of owners selling to continue to increase (29 percent of brokers) and seller expectations on price to become a bit more realistic (22 percent). Perhaps related, 13 percent of brokers believed the small business economy would continue to improve and another 13 percent said President Trump's policies would help spur more business sales.
Similarly, almost half (49 percent) of current business owners believe the small business economy will improve in 2019 with another 31 percent saying it will stay as successful as this year. On a more individualized note, owners believed that strong economy would translate to personal success, with 62 percent expecting their business would perform even better in 2019.
"With a healthy market, more boomer and elder generations are more likely to sell. We expect to acquire in that atmosphere," said one owner looking to expand in the coming years.
Of course, both small business buyers and sellers should also keep a watchful eye on current issues that could affect this market's growth, especially in today's political climate. Twenty three (23) percent of owners did believe that 2018's midterm elections would eventually have a negative effect on small businesses. Another 20 percent believed the opposite, saying the House changes would be a benefit to small businesses.
Business brokers believed rising interest rates were the top threat to the business-for-sale marketplace (23 percent answered it as the #1 threat), while others showed concern over global financial instability (13 percent), an exhausted supply of quality listings (13 percent), minimum wage hikes (12 percent) and political gridlock (9 percent).
"It was another incredible year for small business transactions and the momentum should continue well into 2019," House added. "We expect continued strong deal flow, but both buyers and sellers should also keep a close eye on factors that could affect the marketplace such as political gridlock, potential tariff impacts, rising interest rates, and stock market volatility. Those can be good indicators of how the market could shift moving forward."
About the BizBuySell Insight Report
The BizBuySell Insight Report is a nationally-recognized economic indicator that tracks the health of the U.S. small business economy. Each quarter, BizBuySell analyzes sales and listing prices of small businesses across the United States based on approximately 50,000 businesses for sale and those recently sold, reporting changes in closed transaction rates, valuation multiples and other economic indicators for the small business transaction market. Closed transactions are reported to BizBuySell.com on a voluntary basis by business brokers nationwide. Each report includes real small business data on over 70 major U.S. markets and across 65 small business industries.
BizBuySell is the largest business for sale marketplace online, receiving over a million visitors a month. 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. The website also features an extensive franchise directory as well as an easy-to-use business valuation tool.