BizBuySell survey of brokers reveals optimism that the business-for-sale market will continue to improve in 2016 despite concerns around rising healthcare costs and potential minimum wage hikes
San Francisco, CA — In a nationwide survey of business brokers conducted by BizBuySell.com, the Internet's largest marketplace for buying or selling small businesses, roughly 66 percent of respondents say they experienced a year-over-year increase in transaction activity during 2015 compared to just 14 percent who experienced a decrease.
The main factor behind this growth appears to be an increased number of interested buyers in 2015, which more than a quarter of brokers cited as the top factor helping business transactions close. Other drivers were an improved small business environment (i.e., strengthening revenue, profit) (22 percent) and an increased number of owners looking to sell (20 percent). These three factors also topped the list last year.
"It's encouraging to see that brokers continue to experience an influx of both buyers and sellers entering the market," Bob House, Group GM of BizBuySell.com and BizQuest.com, said. "While the market has been strong for several years now, brokers have yet to experience any decline in number of quality listings. With sellers growing more confident in their valuations, buyers gaining additional access to capital and the small business environment continuing to improve economically, the market is set up for strong transaction levels in 2016."
Half of surveyed brokers cited increased confidence in the economic recovery as the primary reason more buyers entered the market. Similarly, 62 percent of brokers said a larger amount of sellers entered the market as a result of feeling more confident in their ability to successfully exit.
Still, it appears most brokers believe the economic recovery has room to improve further. Two-thirds of respondents feel business transaction volumes have not returned to pre-recession levels. Of those brokers, 46 percent expect business transaction volumes to finally reach pre-recession levels in the next 12 to 24 months.
Even Stronger Transaction Levels Expected in 2016
While 2015 was another strong year for small business transactions, brokers are overwhelmingly optimistic that 2016 will be even better. Roughly 73 percent of respondents expect transaction activity to improve in 2016. These brokers expect growth to continue due to a number of factors, including an increase in the number of owners looking to sell (36 percent), seller expectations becoming more realistic thus improving sales prices (20 percent), and an overall improvement in the small business environment (19 percent).
Brokers in the Northwest are especially confident that the market will improve in 2016, with 86 percent expecting more deals compared to just 69 percent in the Northeast and and 68 percent in the Midwest expecting the same.
Optimism in the market is leading more than a third (33 percent) of all brokers to expect final sale prices to increase in 2016. Only 11 percent expect a decrease and 54 percent expect prices to remain consistent with 2015.
Although 52 percent of all surveyed brokers believe the market favors buyers, another 24 percent believe it is already balanced and 19 percent say it favors sellers. Even if the market remains slightly favorable to buyers, conditions are still not ideal for buyers trying to acquire funding as is evident by the 82 percent of brokers calling seller financing either "important" or "essential" to completing transactions in today's market. That is consistent with the number of brokers that expressed the same sentiment in a December 2014 survey, showing that while more buyers and sellers may be entering the market, seller financing is still a crucial component to closing deals.
Baby Boomers Continue to Supply Market with Listings
The uptick in small business listings is likely being driven by the growing number of Baby Boomers looking to retire. Seventy-seven percent of brokers attributed at least a quarter of their closed transactions to Baby Boomers. 46 percent of brokers attribute more than half of their sales to Boomers. As more Baby Boomers reach retirement in the next few years, brokers believe this trend will continue. In fact, 73 percent said they expect a larger amount of Baby Boomers to sell in 2016 than in 2015, and only one percent expects fewer to do so.
With so many sellers exiting for retirement, it's not surprising that the majority (78 percent) of sellers were 50 years or older. On the other hand, those looking to buy tend to be from a younger group. Nearly 78 percent of brokers indicated their buyers were most likely to be between 30 and 49 years old.
Healthcare Costs, Minimum Wage Rates, Election Among Issues to Watch Next Year
This year ushered in a wave of new federal and local government regulations. For small businesses, these changing laws potentially impact not only profitability, but their ability to sell. One issue of major concern is the rising cost of health care.
In fact, more than 20 percent of surveyed brokers said they've had a client sell their business due to higher health care costs. This will be an issue to watch in 2016, especially considering that a new Affordable Care Act mandate for companies with 50 or more employees will take effect in January.
Another issue brokers are watching is the minimum wage rate. While the debate over whether or not to raise the federal minimum wage continues, numerous cities and states across the country have successfully passed plans to increase their local minimum wage. Brokers were split on whether higher minimum wages affect an owner's ability to sell a business successfully. Forty-seven percent argue higher wages have no affect on the ability to sell, 51 percent say it will decrease the ability to sell, and only 1 percent believe it will increase the ability to sell.
About 8 percent of surveyed brokers said they've had a client sell their business largely due to a minimum wage increase or potential minimum wage increases. Brokers in the Northwest, where cities like San Francisco and Seattle recently upped the minimum wage to $15 an hour, were the most likely to have seen sellers exit due to wage rates.
"Clients, both buyers and sellers, are concerned about the wage increase. It may spur more sellers in 2016," one broker noted. Another added, "I had three sellers this year bring it up as a reason for listing. Their listings have not sold yet."
However, many other brokers argue it's too soon to tell the effects of higher wages. As one said, "In time, the effect of higher payroll on net profit will become more apparent, and we'll see if small businesses can cover the added expense."
Debate over these regulatory changes will likely be hot topic in the upcoming presidential election. Respondents reported a clear favorite in the presidential race, with 44 percent of brokers indicating that Donald Trump is the candidate most likely to improve the small business environment. Hillary Clinton was the next most popular candidate, but at only 15 percent. Marco Rubio and Ted Cruz rounded out the top choices with 9 percent each.
As the election cycle continues, brokers said the issues most important to them are tax reform (61 percent), economic policy (52 percent) and health care (29 percent). In terms of potential threats to the small business-for-sale market, 22 percent of brokers listed higher tax rates as the single biggest threat. This was followed by rising interest rates (18 percent) and global financial instability (16 percent).
"It will be important for small business owners to keep an eye on these issues and decide how upcoming changes could effect their exit strategy," House said. "Talking to a business broker or another advisor can help both buyers and sellers better understand how regulation changes might affect the market and therefore, their business evaluation. Overall, however, it's promising to see that brokers are optimistic that the market will continue to improve in 2016."
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.