Buyers are slightly more confident in today's transaction environment compared to last year while owners remain similarly optimistic they can earn a high for-sale price; most small business owners plan to offset tariff costs with price increases to customers.
San Francisco, CA - BizBuySell.com, the Internet's largest business-for-sale marketplace, announced today the release of its 2018 Buyer-Seller Confidence Index, a national indicator of small business buyer and seller sentiment of the current business-for-sale environment.
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 even confidence.
This year's study revealed a slight growth in confidence for potential buyers while seller confidence remains unchanged from the same time last year. The 2018 Buyer Index stands at 47, up from 46 in 2017, while the 2018 Seller Index remained unchanged at 58. The research suggests buyers are increasingly confident they can find quality listings on the market while owners remain optimistic they will earn a reasonable price when it comes time to sell.
While the economy and politics always play a role in small business optimism, the US-China trade war and President Trump's associated tariffs are having a very real effect on small businesses today. The study presents the true percentage of small business affected by tariffs and explores how owners plan to counter rising costs. BizBuySell's report also reveals a surprisingly high show of support from owners anticipating increased cost of goods as a result.
Owners Remain Confident They Can Successfully Exit Their Business
The Seller Confidence Index holding strong at 58 tells us small business owners feel strongly that they can successfully exit their business and receive an acceptable sale price in today's active market. In fact, 60 percent of owners said they are confident they would receive a price that met their expectations if they sold their business today. Additionally, close to 40 percent believe the for-sale environment has improved over the last year, saying they could receive a higher sale price for their business than at the same time in 2017. Those owners credited improving sales and revenue (56 percent), an improving small business economy (51 percent) and the evolving outlook of today's current political environment (24 percent) as reasons why they are able to increase the for-sale price of their business.
"I've been able to grow my business almost 5 percent a year and incur fewer expenses than I did when it was new, so my net income is up significantly," said one business owner.
The confidence owners have in today's market is validated by the sheer number of new businesses listed for sale. According to BizBuySell's Q2 Insights Report, the number of open listings increased 6.7 percent from the same time last year. Those same for-sale businesses also reported increasing revenue (up 7.4 percent) and cash flow (up 3.4 percent), allowing for an increase in the median asking price (up 4 percent). It's no surprise that as current owners see they can ask and receive more for their business, they are more likely to test the market.
This is especially good timing for Baby Boomer business owners, most of whom are approaching retirement and looking to exit their business soon. In fact, according to BizBuySell's recent demographic survey, more than half (53 percent) of current owners are classified as Baby Boomers. Per the confidence study, 31 percent of current owners plan to retire upon completion of their business sale, up 6 percent from last year's report.
Of course, there remain some uncertainties regarding the actual value of businesses in the market. Owners were split on how their business values have shifted over the past few years. While 45 percent believe their valuations increased, 31 percent believed their values decreased. Reasons for skepticism included increasing costs (43 percent) declining sales and revenue (27 percent) and a depressed small business economy (24 percent).
Today's divided political climate likely increases the split, with Republican owners more optimistic (94 percent) and Democrat owners (86 percent) more pessimistic about the U.S. government's impact on the small business community.
In Spite of Rising Prices, Buyers Continue to Enter the Market
In 2017, the Buyer Index dropped three points, mainly caused by the belief that for-sale prices will continue to increase. However, the slight uptick in the 2018 Buyer Confidence Index score hints that buyers are more apt to purchase a business in the near future than they were a year ago.
The boost in optimism can be attributed to buyers' view of the future. Nearly 30 percent of buyers anticipate getting a better deal next year, up from just 22 percent who said the same in 2017.
"Market churn seems average. Banks are willing to lend if you have collateral, and interest rates are rising but reasonable," said one buyer.
Of course, this doesn't mean that prices aren't a concern to those eyeing current listings. Thirty-six percent of prospective buyers think they would have been better off purchasing last year instead of this year, up from 31 percent who said the same in 2017. When asked what has changed over the past year to make small business sale prices less acceptable, 57 percent of buyers stated that owners are setting unrealistic asking prices.
In fact, 60 percent of prospective buyers believe small businesses currently listed on the market are overvalued, compared to just four percent who believe they are undervalued. That said, the majority of buyers (71 percent) believe they would be able to buy a business in 2018 for an acceptable price. It seems that even though it might cost a little more, buyers are willing to pay the price for the right business.
"I would conduct thorough due diligence and look for a business with upside. I will continue to be patient and not overpay for a business," said another buyer.
BizBuySell's Q2 Insights Report does show while small business asking prices are increasing, transactions are not slowing down, suggesting buyers are willing to pay a higher price if the business has the financials and potential to back it.
"Based on our Annual Insights Reports, we've seen small business prices continue to rise since 2011 and while some buyers may be scared off by the price tag, the reality is that it creates a win-win situation for both parties," said Bob House, President of BizBuySell.com & BizQuest.com. "The owners, many of them Baby Boomers looking to retire, will receive more for their business, but the buyers are also receiving more financially-healthy, profitable businesses than they were a few years ago. This is a big reason why there have been so many transactions taking place this year and we expect that to continue into 2019."
Most Small Business Owners Support Tariffs, But Customers Will Take the Hit
Split opinions on today's political leaders and regulations will no doubt affect a particular buyer or seller's confidence on the future of the small business environment. One issue weighing particularly heavy on the minds of owners today are President Trump's recent tariff regulations.
When asked about tariffs, more than three out of four business owners said they support the United States' trade tariffs.
While a majority of owners (60 percent) said the tariffs would have no impact on their business, 30 percent said it would negatively affect the business. Only 10 percent said it would benefit the business. Most interesting of all, over 50 percent of owners who said the tariffs will negatively affect their business still support the initiative.
"I import 90 percent of my inventory so tariffs will hurt my business but are necessary to the American economy," one owner said, prioritizing the bigger picture over their own financials.
"Costs may go up on some imported items, but other items should come down, thereby making it close to a wash," another owner said.
As with most business cost increases, the people who will likely feel the biggest impact will be the end customers. When asked how owners would cover their increased cost, proportionally increasing prices (34 percent) was the number one response. Another 32 percent said they are still unsure how they will make up the difference. Thirteen percent said they would simply take the bottom line hit and 12 percent said they would cut spending in other areas. Only four percent said they would reduce headcount and just one percent would cut wages.
"Although these tariffs will have a negative impact on our business now, I do feel strongly that we have been taking a weak position on trade to avoid this issue and kicked the can down the road for decades. This is very tough to go through but it will be better in the long run," declared one owner.
Party lines were a divisive factor affecting owner opinions on whether the tariffs will actually be beneficial in the long run. Nearly 90 percent of Republican business owners support the tariffs while just 27 percent of Democratic owners felt the same.
Finally, while these tariffs will change the way certain owners operate their business, they could also affect the number of buyers willing to take over a business.
Counter to the overwhelming number of owners supporting tariffs, just 30 percent of buyers agreed. Twenty-three percent of those buyers went so far as to say that if the tariffs remain in place, they would be less likely to pursue a small business investment.
Overall, the uncertainty of these trade regulations, as well as their effect on SMB bottom lines, will certainly be something to watch in the coming months and years. The confidence index demonstrates most owners remain confident in the market overall while survey data shows tariffs could be propelling that confidence forward. Buyers are likely to be more cautious about the future of the small business market and should investigate the effect of tariffs more closely when considering a purchase in the near future.
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.