Small business owner confidence has declined from the same time last year amid political and economic uncertainty while buyers see an opportunity to take advantage.
San Francisco, CA - BizBuySell.com, the Internet's largest business-for-sale marketplace, announced a drop in business owner confidence and an increase in buyer confidence in its 2019 Buyer-Seller Confidence Index, a national indicator of 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 transaction environment and 50 representing level confidence.
The 2019 index experienced the largest swing since BizBuySell began analyzing small business confidence in 2013, in large part due to political and economic uncertainty. Current owners, the potential sellers, are concerned of losing value given market volatility, while buyers are eyeing an opportunity to enter the market at a discounted price. The result is a year-over-year drop in the Seller Confidence Index, from 58 to 52, while the Buyer Confidence Index rose from 47 to 53 over the same period.
For the first time in BizBuySell confidence analysis, the positive seller (52) and buyer (53) indices show that both sides are optimistic about their ability to exit or enter the small business market. BizBuySell's Insight Report echoes this sentiment, showing that while 2019 has not been without uncertainty, transactions remain at a high level historically in parallel with strong financial performance.
"With tariffs in the news, a recession being discussed and politics in such a divided state, current owners and buyers have a lot to consider as they contemplate their future", Bob House, President of BizBuySell.com and BizQuest.com said. "This is especially true as we get closer to election year. That said, it's good to see both buyers and sellers remain confident overall in the market."
Tariffs to blame for drop in owner confidence?
The Seller Confidence Index dropping 10% tells us that there is increasing uncertainty surrounding small business owners' belief that they can successfully exit their business and receive an acceptable sale price in today's market.
Nearly half of business owners (44.5%) said they are only "somewhat confident" they would receive a price that met their expectations if they sold their business today. Digging deeper, there is a divide on market trajectory as illustrated by the 36% who believe they would have received a better price last year compared to the 36% who felt value has improved in 2019.
Owners with low confidence blamed a number of factors, with a depressed small business economy (18%) leading the way. Others cited increasing costs (14%), declining sales/revenue (14%) and a lower demand for small business ownership (9%).
A critical factor in increasing costs and declining sales are recent tariff policies, specifically between the US and China. Over a third (37%) of owners said costs have increased due to the new tariffs. To cover rising costs, 51% of those business owners have increased prices, which has resulted in declining sales for roughly one of two owners (46%). The data exhibits how tariffs can cause uncertainty, not just for large enterprises, but even main street business.
Alongside tariffs are concerns about a recession hitting the U.S. Surveyed owners were split on how much they should be worried about the threat. Just under half (45%) said they were confident in the economy remaining at its current level while an identical 45% said they were concerned with the future. When asked directly when a recession might hit, 1 in 4 owners (25%) believed it would happen before the end of 2020. Eleven percent (11%) predicted 2021 and another 31% said within in the next 5 years.
Not surprisingly, owner sentiment on tariffs and the economy are influenced by political alignment. Seventy-one percent of Republican business owners agreed with the tariffs, even some that have had business costs increase, while 87% of Democratic owners oppose the tariffs. Similarly, 42% of Democrats said they were "extremely concerned" about the future of the U.S. economy versus just 6% of Republicans who felt the same. Democrats were also much more concerned the recession would hit sooner. Fifty-two percent of Democratic owners predicted recession by the end of next year compared to just 12% of Republican owners.
Buyers see economic uncertainty as opportunity
While owners interested in selling are becoming more cautious, buyers see an opportunity to 'buy the dip'. The Buyer Confidence Index rising by 13% indicates optimism that not only can they find healthy business listings, but they can also access the capital and negotiate a favorable price. In fact, a majority (74%) of surveyed buyers said they were confident they could purchase a business at an acceptable price today.
More than half (57%) of buyers believed today's business values remained similar to last year while another 17% said they could get a better deal today. When asked what they attributed the better deals to, these buyers credited an improving small business economy (21%), owners setting more realistic asking prices (17%) and improving business financials (15%).
Buyers were also less concerned about current issues like tariffs and a possible recession. More than 51% said tariffs remaining in place would not affect their buying decision while another 27% said they were unsure, perhaps waiting to see how the tariffs affect asking prices.
As for the economy, buyers were split on their predictions. More than 46% said they were concerned for the future compared to 45% who said they are confident the economy will remain at its current level. Twenty-five (25%) believed a recession would hit by 2020 with another 12% believing it will come in 2021, but not all of them saw that as a bad thing for their purchase efforts.
"An economic downturn will help lower all pricing, including businesses for sale," one prospective buyer commented.
Finally, interest rates are another economic issue buyers have significant interest in. Today's low rates may be allowing for greater access to capital, and thus incentivizing more people to pursue small business ownership. In fact, 29% of surveyed buyers said current rates are speeding up their decision to purchase, meaning demand should continue to grow in future months.
Retail and manufacturing highlight confidence divide between sectors
While political affiliation has a role in confidence, business industry is another important factor. When analyzing confidence by sector, retail business owners were the least confident with a 48 confidence index, much lower than the 52 blended average. For these owners, it's likely that tariffs are only compounding an existing fight to offer products at prices that can compete with corporate giants, such as Amazon, eBay and BestBuy.
"It's getting so hard for us small businesses," one retailer said, noting the rising cost to fend off big business. "We have to compete with the likes of Amazon and huge companies. We simply can't afford many conveniences, like computer support, that a large company might take for granted."
The challenges facing retail become even more apparent when comparing retail owner responses versus those in manufacturing, another industry hit by the US-China tariffs. The 58 Confidence Index of manufacturing owners is the highest of any sector, despite 59% of owners reporting increased costs as a result of the new tariffs. A possible explanation for the confidence disparity between the retail and manufacturing sectors involves their customer and competitive landscapes.
Retail businesses are in direct competition with corporate giants and normally serve a consumer audience with an abundance of choices. Manufacturing businesses on the other hand often serve the B2B market without the big box competitive concern. As a result, manufacturing businesses may have an easier time passing along cost increases to customers than those owners in retail.
Not surprisingly, the two industries least likely to be impacted by tariffs, restaurants and service businesses, have a mid-range index at 52 and 53 respectively.
Overall, the 2019 Buyer-Seller Confidence Index indicates a strong market, but one with much uncertainty.
"I expect the economic environment and related uncertainties to continue," one owner said. "As a result, I think the future is less clear than 2 or 3 years ago"
As the 2020 election draws near, small business owners and prospective buyers have to gauge how economic changes affect their decision to enter the marketplace. What is clear, is that despite some uncertainties, small business transactions are still occurring at a high pace and that should continue through 2019 and into the new year.
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.