Market confidence dips compared to 2016 as both buyers and sellers wonder how much longer business for sale prices will increase.
BizBuySell.com, the Internet's largest business-for-sale marketplace, released its 2017 Buyer-Seller Confidence Index, a national indicator of small business sentiment of the current business-for-sale environment.
This year's study revealed that both buyers and owners are less confident in the market than at the same time last year. The 2017 Seller Index, while still positive, dropped slightly from 59 last year to 58 this year. The 2017 Buyer Index, meanwhile, dropped more significantly, from 49 in 2016 to 46 in 2017.
The confidence index is calculated by evaluating survey responses of more than 2,000 entrepreneurs interested in either buying or selling a small business. Scores range from 0 to 100, with 100 representing a perfect environment for buying or selling a business and a score of 50 representing neutral confidence.
Owners Remain Confident They Can Get an Acceptable Price, But Just For Today
The slight drop in Seller confidence doesn't diminish the overall positivity that has persisted since BizBuySell started calculating this data in 2013. Similar to last year, 60 percent of current owner respondents said they are confident they would receive a price that met their expectations if they sold their business today. Additionally, more than 40 percent believe the environment improved in the last year, saying they could receive a higher sale price for their business than at the same time in 2016. Those owners credited improving sales and revenue (62 percent), an improving small business economy (43 percent) and an increased interest in their business industry (25 percent).
"The stock market has been going up, which increases consumer confidence and stimulates small business. Due to these various factors, small business acquisitions are in demand," said one current owner.
Seller confidence in today's market is validated by the number and type of businesses hitting the open market. According to BizBuySell's Q3 Insight Report, the number of businesses listed for-sale increased nearly 7 percent from the same time last year. In addition, listed businesses displayed increasing revenue (up 4.4 percent YOY) and cash flow (up 3 percent), allowing for an increase in the median asking price (up 5.9 percent).
As owners remain optimistic in today's market, there is evidence that some might be concerned of an upcoming peak. Just 41 percent of owners believe their business would be more valuable next year; a significant drop from the 48 percent who believed the same in 2016. Furthermore, an increasing percentage of owners believe their business value would not change at all if they waited a year; 47 percent versus 40 percent a year ago.
Perhaps more signaling of a perceived pricing plateau, 2017 results show a 50 percent increase of owners who saw no value increase versus the prior year, up to 29 percent from 19 percent a year ago. Another 30 percent of owners believe their business value decreased. Reasons cited for declining value include increasing costs (33 percent) a depressed small business economy (30 percent) and declining sales and revenue (23 percent).
The mixed responses from owners who are more or less optimistic explains the 1-point drop in the Seller's Index and can likely be attributed to varying environments across regions and industries.
"The climate for my business has declined with the aggressive nature of Amazon and other online outlets," said one retail business owner. That sentiment was echoed in BizBuySell's recent poll of owners, showing 65 percent perceive online marketplaces, such as Amazon, a threat to small business. "While interest rates and financing create a favorable environment, declining unit volume and rising labor costs are squeezing margins," another owner said.
Overall, sellers remain confident but appear cognizant of the issues that could affect their business value going forward.
Buyers' Confidence Falls as Concern for Future Prices Takes Hold
While sellers have been consistently confident in their ability to fetch a good price for their businesses, buyers feel those rising prices come out of their pocket. It is perhaps no surprise then that the Buyer Confidence Index has remained below 50 since 2014, indicating acknowledgement that healthier small businesses mean higher asking prices. Maybe more interesting is that while buyers and owners share concern of what's to come, owners fear a peak while buyers fear continued price increases.
The 2017 Buyer Index dropped 3 points, mainly caused by buyer belief that prices will continue to increase. Only 22 percent believe they would receive a better deal by purchasing a business next year, a drop from 29 percent at the same time last year. Instead, a growing number (21 percent) of buyers believe they will receive a worse deal if they wait until next year, an increase from the 15 percent that thought the same in 2016.
"If the political infusion into relaxing business regulations takes hold, the purchase prices for businesses will continue to increase," one buyer said, citing the political scene as reason for ongoing rising prices.
The belief that next year will result in higher asking prices correlates with buyers' overall belief that small business sellers are already setting their asking prices too high. More than 55 percent of buyers said they believe currently for-sale businesses are overvalued, and a mere 4 percent felt they were undervalued.
"With the stock market at an all-time high, and with high job force participation, lots of sellers think they can get top dollar," another buyer said.
While rising prices in 2018 remain speculation for now, increases appear to have become a reality for buyers seeking to transact in 2017. 31 percent of buyers felt they would have been better off buying a business last year versus just 15 percent who felt they can find better value now. Once again, the top reason for these perceived worse conditions were owners setting unrealistic selling prices. High asking prices were cited by more than half of buyers who believe they could have a received better value last year.
"The economy is doing better so prices are being increased, but for less cash flow," one buyer explained.
Interestingly, the second most listed reason was a higher demand for small business ownership (42 percent), meaning buyers are seeing more competition for the businesses they are interested in. While many consider rising demand a negative, some buyers are hoping it will result in more sellers looking to take advantage and in turn, more opportunity to find the right fit. "I see a lot of retiring baby boomers without succession plans, which will lead to better purchase options despite a higher cost to borrow," a buyer said.
"During the last recession, we saw buyers getting great deals on small businesses because of the depressed economy and health of listed business, but it came with higher risk." House says. "As times have become more certain, those deals have evaporated and buyers have to adapt to the more equal-footed market. The record pacing number of transactions we're seeing now suggests they are."
1 in 4 Sellers to Retire as Baby Boomers flood market; Buyers relying on SBA loans, bank & seller financing to close deals
BizBuySell's Insight Report data has shown a steady increase in both listing and sold small business over the past two years. Much of the increased activity has been due to Baby Boomers reaching retirement age and that does not appear to be slowing down. The confidence study supports this as 25 percent of current owners say they will retire upon completion of their business sale.
Those who don't plan on retiring seem to be part of the serial entrepreneur community. Thirty-one (31) percent of owners said they hope to start another business after they sell while another 25 percent intend to buy another business to run. Only 9 percent want to find a non-ownership job for another company.
When sellers do move on from ownership, the majority won't be handing the keys to the family. The common perception of a small business is that it may be passed down from generation to generation but the reality is that most owners expect to sell to someone they don't know. Over 38 percent of owners say they plan to sell to a third-party owner and another 26 percent hope to be sold to or acquired by another company. Just 17 percent plan to pass the business to a family member and 11 percent to a current employee.
Finally, when owners sell their business, they should plan to receive the money over time and not as a big down payment. That's because buyers expect the seller to take on some of the risk, with 41 percent hoping to pay for part of the business through seller financing. Not surprisingly, the other biggest source of capital will be bank financing (50 percent) and SBA loans (48 percent).
"The business-for-sale market is strong when both sellers and buyers can find common ground in not only the sale price, but the other aspects that go along with a transaction," House said. "The fact that we've seen such strong activity over the past few years shows that both sides are finding value in today's market, even as it grows more crowded."
About the BizBuySell's Business Buyers-Seller Confidence Index
BizBuySell.com is the Internet's largest marketplace for buying or selling a small business, with over 1.6 million monthly visits. The company releases its Business Buyer-Seller Confidence Index on an annual basis, reporting changes in buyer and seller opinions of the current business-for-sale environment. The index and scores are calculated through a number of weighted survey questions issued to over 2,000 people currently interested in either buying or selling a small business. For more information on the survey findings and index scores, please contact BizBuySell directly.
Walker Sands Communications
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 48,000 businesses - spanning 80 countries - for sale at any one time and receives more than 1 million 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.