Business valuation metrics decline even as business-for-sale transactions continue to rebound
San Francisco, CA -- BizBuySell.com, the Internet's largest marketplace for buying or selling a small business, today released economic data for the first quarter of 2010 that suggests small business-for-sale transactions and valuations have continued to show signs of a slow but sure economic recovery.
According to the BizBuySell.com Insight Report data, the number of closed transactions reported to BizBuySell.com in First Quarter 2010 rose slightly, 0.3 percent, as compared with the same time period in 2009 -- from 1,146 transactions to 1,149. Market improvement is more evident when comparing First Quarter 2010 data to the prior quarter, with BizBuySell.com reporting a healthy 6.3 percent increase in transaction volume. Closed transactions are reported to BizBuySell.com by business brokers nationwide.
"Although the numbers are somewhat flat, the business-for-sale market continues to move in a positive direction, with each quarter since the Second Quarter of 2009 showing improved performance versus the year-ago period," says Mike Handelsman, General Manager of BizBuySell.com. "Motivated business sellers are increasingly able to get deals done at reasonable terms, and more business buyers are finding good value in the market at this time."
Business Valuations Drop, Driving the Increase in Transactions
Driving the increase in completed deals, BizBuySell.com notes downward changes in the metrics that are used to value companies. Compared to the same quarter last year, revenue multiples and cash flow multiples have both declined, suggesting that business buyers may be able to buy business value at a discount, compared to prior years.
Revenue multiples on reported closed transactions in First Quarter 2010 fell from 0.69 to 0.64 compared against First Quarter 2009, representing a 7.4% decrease. Similarly, cash flow multiples dropped slightly from First Quarter 2009's 2.69 to First Quarter 2010's 2.51, representing a 6.5% decline. The revenue and cash flow multiples are calculated by dividing the selling price of the business by its reported annual revenue or cash flow.
The median sale price for closed business-for-sale transactions during First Quarter 2010 was $150,000, down from $165,500 in First Quarter 2009, suggesting that buyers may have the upper hand over sellers in the current business-for-sale market.
"There is no doubt that we are in a strong buyer's market," says Handelsman. "Many sellers trying to sell their companies have weaker financials due to the difficult economy. As a result, those sellers, and even some sellers of healthy businesses, have been dropping their prices in order to get a deal done."
How Sellers Can Help Improve Their Business's Value
While current market conditions are creating a buyer's market, there are still ways for sellers to make their businesses more attractive to foster a successful business sale. BizBuySell.com suggests that sellers consider the following attributes of closed transactions that have helped those businesses reach a deal that works for both buyer and seller:
Be Realistic About What Your Business is Worth - Prices of small businesses have come down over the last 12 to 24 months, both in terms of average sale price, and multiples of company cash flow and revenue that businesses are selling for. This is the result of a few factors, but most notably a lack of confidence from buyers that the economy will improve quickly, and a lack of available capital. Overpriced businesses are having a hard time selling successfully, especially with many other businesses selling for lower prices.
Be Willing to Offer Seller Financing - Because small business lenders and the U.S. Small Business Administration are being more careful about whom they lend money to, and under what terms, capital is much more difficult to obtain than it was a few years ago. As a result, it is very rare today for a small business transaction to close without the seller providing some form of financing to the buyer. Usually, this takes the form of accepting 25-75% of the purchase price of your business as a 3-5 year loan to the buyer, rather than as cash up front. While this generally something that a seller does not want to deal with, it's almost a necessity in today's challenging credit market.
Give the Buyer a Roadmap to Success - Buyers are tentative, and the market is challenging. As a result, those sellers that can provide potential buyers with a plan for success will give themselves a better chance of making a sale happen. A list of potential revenue enhancement ideas, cost-cutting ideas, or just the ability for the seller to stay on in a consulting role for 6 to 12 months can all greatly enhance the potential buyers' vision of success, which can help get them over the hump in making this difficult decision.
About the BizBuySell.com Insight Report
The BizBuySell.com First Quarter 2010 Insight Report includes business-for-sale metrics for the total U.S. and for more than 70 major metropolitan areas. Metrics are also available by industry and business type. The current Insight Report comprises data from 1,149 closed transactions and more than 31,800 active listings.
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.