Number of Small Businesses Changing Hands Dips Slightly, But Market Remains Ripe for Buyers & Sellers
Small business transactions in the first quarter of 2019 experienced a modest year-over-year decline but remain at historically high levels, according to the latest BizBuySell Insight Report, a nationally recognized economic indicator that aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide. A total of 2,504 sold businesses were reported in the first three months of 2019, a 6.5% decline from the same period last year. Similarly, Q4 2018 saw a 6% decrease from the same quarter in 2017.
It is important to note that both 2017 and 2018 set new records for the most annual small business transactions since BizBuySell started reporting the data in 2007. So while reported deals are down slightly from a year ago, the market continues to be very active compared to the previous decade. In fact, Q1 2019 represents the second highest first quarter on record, trailing only 2018. It is too early to tell if the recent plateau marks any kind of market shift or not. To gain additional perspective, BizBuySell also surveyed business owners and some leading brokers, the results of which are incorporated within this report.
A number of factors could be tempering the strong transaction growth rates seen in recent years. Most notably, these include the recent government shutdown, low unemployment, record profits, deal financing, and general uncertainty around the impact of administration policies relating to tariffs, immigration, and health care.
“Main Street business sales may have been impacted in part due to a stronger economy where individuals are more satisfied as employees (not looking to purchase businesses) and business owners are seeing higher profits (not looking to sell their businesses)”, said Jeff Snell, Chairman of the International Business Broker Association, the industry’s leading trade group. “Also, time to complete business transactions has increased marginally, potentially as a result of the Federal Government budget shut down which closed SBA loan guarantee processing offices. However, broker optimism through 2019 remains strong”, Snell added.
“The business sale market still continues to perform strong in 2019 in terms of number of deals getting done and the multiples sellers are receiving. However, we are seeing signs that the market could become more challenging in the future with interest rates rising and financing becoming both more expensive and harder to acquire. This can make the buyer process lengthy and more difficult, which would suppress multiples and extend time to close”, said Jessica Fialkovich, President, Transworld Business Advisors of Denver.
Of course, it is also possible the past two quarters have been outliers and 2019 will continue on its multi-year growth trend in upcoming quarters. It is something to watch closely as data comes in over the rest of the year. Inventory remains strong, with a 6.1% increase in listings in Q1 over the same quarter last year.
“After several years of record activity, it’s good to see that there are still plenty of listings coming on to the market, so the small decrease in activity may be more about buyers taking a cautious approach than a slowdown in the supply,” Bob House, President of BizBuySell.com & BizQuest.com, said.
Q1 2019 Small Business Financial Health
The financials of sold businesses in the first quarter remained healthy. The median revenue of sold businesses grew 6.5% from the same time last year to $540,000. Median cash flow was $116,830, a 2.6% dip from Q1 of 2018.
Cash flows often fluctuate regularly based on the seasonality of businesses, but one factor that could have also affected this was the January government shutdown. In BizBuySell’s most recent poll of small business owners, 18% of respondents said their business was negatively affected by the shutdown, and of those, 40% said they still have not recovered. Owners cited their customers’ lost wages, less foot traffic at their locations, lost payments from government contractors and delays in SBA loans as the biggest reasons the shutdown hurt their business.
Business owners are also dealing with their taxes at this time. This tax filing season represents the first full year under the Tax Cuts & Jobs Act, and so far owners are seeing mixed results. In the same BizBuySell survey, 22% of business owners who have already filed their tax returns this year said their taxes went down from 2018 compared to 14% who said taxes went up.
Q1 2109 Small Business Values
While financials remained relatively strong in the first quarter, the national median sale price of sold businesses dropped 8.2% from Q1 2018 to $225,000. Not surprisingly, the asking price of those businesses also dropped, a 4.6% dip to $250,000. This could be a symptom of smaller businesses being exchanged in Q1, as well as the slight cash flow drop from last year. The average Cash Flow Multiple remained essentially unchanged at 2.33 (up 0.1%).
Interestingly, the median asking price of small businesses listed for sale in Q1 actually rose 4.6% to $275,000, suggesting there may be a growing divide between what owners believe their businesses are worth and what buyers are willing to pay. That sentiment is supported by the fact that the average number of days on the market for a sold business climbed 6.3%, reaching 185 days compared to 174 last year. Time on market has increased the last three quarters.
Owners will certainly keep a close eye on how their valuations could be impacted by any changes in the economy. In fact, in BizBuySell’s poll, owners listed an economic recession as the top risk to their business. Over a third of those owners said they expect the next recession to occur within the next three years (only 9% felt it would happen in 2019). To prepare their business for these types of economic swings, respondents said they are trying to increase customer volume, diversify revenue flows and keep a higher cash reserve. Beyond a recession, other concerns included a talent shortage (17%), larger competitors (12%), and government regulations (12%).
Q1 2019 Industry Breakdown
With total transactions decreasing slightly, most industries followed suit. Interestingly, however, the retail industry saw a significant bounce back after a slow final quarter of 2018. Total retail business transactions rose 25% compared to last quarter, but the increased transactions were accompanied by small declines in sale multiples and the sale-to-ask price ratio resulting in a drop in the median sale price from $229,000 to $187,000 quarter over quarter.
Similarly, restaurant transactions grew from a slower Q4 of 2018, and surpassed Q1 2018 sales as well. Unlike retail businesses, however, sale prices took a nice jump from $152,500 to $180,000 quarter over quarter. Other good news in the restaurant category includes over a 10% increase in both median revenue and median cash flow for all listed businesses, showing a healthy supply of quality restaurants remains available for purchase.
Finally, the manufacturing sector experienced a softer quarter compared to Q1 2018. The 98 reported transactions represented a 16.2% decline, and the businesses that sold had lower revenues and cash flows than those from the year prior. This led to a median sale price of $575,000, an 8% year over year decline. The Cash Flow Multiple dipped slightly (-2.6%) to 2.79.
For the full year 2018 breakdown of data by industry, click here.
Q1 2019's Top Performing Markets
At the city-specific level, Detroit saw the most significant increase in the number of sold businesses. The number of small businesses changing hands grew 114% from the same time last year, the largest such jump of all cities with 25 or more transactions during the quarter. San Francisco followed with a 62% increase in closed transactions from Q1 2018. Baltimore had the third highest growth rate at 41%. Major cities that saw a decrease included Orange County (down 48%), Atlanta (down 33%) and Orlando (down 31%).
For potential buyers, purchasing a business in Indianapolis became more expensive. The median asking price grew 40% to $400,000, the highest growth rate and the highest asking price in the nation (minimum 100 listings). Other markets with higher asking prices included Salt Lake City ($350,000), Providence ($345,000) and Minneapolis ($320,000).
For a full breakdown of the top U.S. markets, click here.
Q1 2019 Differences by Deal Size
While most sold businesses on BizBuySell.com are deals closer to the $225,000 median sale price, there remains a strong representation of valuations over $1,000,000 as well. Over 300 of these businesses sold in Q1 2019, representing about 12% of total transactions. Owners of these high-valued businesses capitalized upon strong financials to earn an impressive .96 sale-to-asking price ratio. That’s compared to just a .91 ratio for all transactions.
Deals over $1,000,000 can be complicated transactions, with more due diligence and negotiations, but those that sold in Q1 took an average of 194 days to sell, only nine days longer than deals of all sizes. The sellers of these bigger deals were rewarded with higher valuations with an average revenue multiple of .93 (compared to 0.58 for all deals) and an average cash flow multiple of 3.83 (compared to 2.33 for all deals).
Despite the decline in reported transactions over the last two quarters, the market is still very active and continues to receive favorable tailwinds. These include an aging and retiring population of baby boomers looking to exit their businesses, strong business fundamentals with several years of growing revenues and profits, and readily available financing at historically low rates. In addition, there is strong interest among a new generation of entrepreneurs to take on these opportunities instead of working for someone else or risking a brand new start up.
Brokers seem to agree.“We are seeing more quality businesses coming on the market with good, clean books than I have seen in my 25+ years in the business”, said Matt Coletta, Co-Founder and Managing Partner, M&A Business Advisors.“We are seeing owners being less and less aggressive with running a ton of perks through their businesses, which can minimize taxes in a given year, but that reduced profit also reduces their valuation when it comes time to sell.Buyers are more attracted to profitable businesses with clean books and records, and even with increases in the prime lending rate, financing is still relatively cheap.”
“It will be interesting to see what the rest of 2019 holds for the industry”, said House. “We saw more brokers reporting sales in Q1 than in any prior quarter, but they reported fewer sales per broker than in recent quarters.It’s good to see more brokers coming into the industry, and if financing remains affordable and accessible and confidence levels high, we are optimistic this will translate to brokers closing more deals going 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.