BizBuySell.com's Second Quarter 2019 Insight Report shows a dip in small business transactions in light of the ongoing Trade War, but growing financials and record sale prices continue to show signs of a strong market.
Small business transactions in the second quarter of 2019 continued to slip below last year, however sales are still being reported at historically high levels according to the latest BizBuySell Insight Report, a nationally recognized economic indicator that aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide. In fact, the 4,948 transactions reported in the first half of 2019 put this year on pace to become the second most active business-for-sale market since BizBuySell started tracking data in 2007, trailing only 2018’s record-setting levels.
While the 2,444 transactions reported in Q2 represent a 9.6% dip from the same time last year, it’s important to note that Q2 still ranks among the most active quarters over the last decade. More brokers reported sales in Q2 of 2019 than in the same quarter of 2018, however the average number of deals reported per broker declined. The slowdown may be at least partially due to uncertainty related to political policies. Specifically, questions around the true impact of tariffs between the U.S. and China, and the potential for additional international tariffs to enter the fold.
According to BizBuySell’s recent poll of business owners, 43% are facing rising costs due to tariffs on Chinese goods.
"Some of the products I sell to my customers originate from China. I have been told by my distributor to expect costs to increase accordingly," said one owner.
With this year’s tariffs coming as an unexpected liability, owners are likely scrambling to assess their business’ value, and more importantly, working on a strategy to maintain it. More often than not, the strategy will have a direct impact on customers.
BizBuySell’s poll, which surveyed more than 1,600 small business owners across the U.S., revealed 64% of affected owners plan to raise prices in order to offset rising supplier costs. Just 27% plan to cut spending. While most owners are confident in these counter measures, 20% of owners said they would be unable to stay in business if a 25% tariff on imported goods lasts more than a year.
"Manufacturers have moved their production plants to those locations with NO other alternative," one owner said.
Interestingly, 65% of small business owners are, in fact, considering switching to suppliers outside of China. Of those owners, 54% said they would look for a U.S. based supplier, which would provide a boost to the domestic economy, but might prove challenging.
"We always look for other U.S. vendors. We attend the Made in USA trade shows, but it becomes more difficult when it’s faster to get items thru Amazon than to deal with many U.S. companies," explained one owner. Another added, "A U.S. based supplier would be preferable, but their quality and pricing would have to make them competitive. This is what I have not seen yet."
While owners work to develop a strategy to counter costs and incoming buyers assess the same, it’s understandable that transactions might take longer to complete. This is especially true at the bargaining table, where both parties weigh how much of what is hopefully a short term pain will affect the future value of a business. BizBuySell data supports this theory as the median amount of time a listing remained on the market rose 7% to 183 days in Q2 compared to last year.
"I do think the trade war is having a small impact right now, mainly due to the uncertainty in the market," said Dustin Zeher, Principal Broker for Horizon Business Brokers, LLC. "I feel like we are seeing a small decrease in demand and buyers are taking a little longer to make a decision."
Russell Cohen, President of Murphy Business Brokers South Florida, provided additional insight on the trade war's impact on business values. "Tariffs are starting to impact businesses in certain industries, and will only increase over the coming months as business owners run out of their existing inventory,” explained Cohen. “As it relates to sales, these companies will need to raise prices or be forced to take lower margins which will change their business valuations."
It will be interesting to watch how the continued trade war negotiations of the Trump administration affect buyer and seller activity in the coming quarters, especially as election season draws closer. That said, for buyers looking for opportunity, there remains an increasing supply of quality listings available on the market. In fact, the number of businesses listed for-sale on BizBuySell grew 5.4 percent in Q2 compared to the same time last year. Those businesses reported both increased revenue and cash flow, showing that even after several years of robust activity, there remains a wealth of financially healthy businesses awaiting buyers who are ready to enter small business ownership.
"The data shows that even with economic uncertainty, 2019 remains a great time to buy or sell a small business," said Bob House, President of BizBuySell.com and BizQuest.com. "There are still a growing inventory of businesses hitting the market, and financially, these businesses are performing better than ever. The ongoing tariff discussions will certainly be concerning to some buyers and are something to watch in the coming months, but based on what we’ve seen, there is still much value to be had in today’s market."
Q2 2019 Small Business Financial Health
Perhaps most indicative of the health of the small business market is the strong growth in the financials of businesses sold in the second quarter.
The median revenue of sold businesses rose 14.3% to $601,380, the highest mark on record. Much of that growth can be attributed to the retail and service industries, where the median revenue increased 20% and 17% respectively compared to Q2 2018.
At the same time, the median cash flow grew 8.3% to $130,000, led by service-oriented businesses, which increased 10%. This is a nice bounce back from the first quarter of 2019 when the overall median cash flow of sold businesses declined year over year.
With the stock market high, wages increasing and unemployment declining, it’s good to see that money is trickling down to the main street businesses that represent a significant portion of the U.S. economy. This is especially rewarding for retirement-seeking baby boomers, who make up a large portion of sellers and are likely to be well-rewarded for their lifelong efforts.
Q2 2019 Small Business Values
In more good news for small business owners, businesses sold in the second quarter of 2019 closed for a record-high median sale price of $270,000. This represents a significant 13% jump from the same time last year and is a nice bump from the first quarter of the year, when the median sale price stood at $225,000. The rising sale price is a direct result of improving financials and a nice reversal from Q1 when the median sale price had declined. That both business financials and related sale prices have swiftly changed course from the first quarter could label Q1 as more of an outlier than a trend.
Not surprisingly, the median asking price for businesses sold in the U.S. also increased, up 15% from Q2 of 2018, to $299,000. As financials improve, owners are setting a higher bar for their businesses. At the same time, buyers appear more than willing to pay a premium for a proven business with a bottom line that supports continued success.
Q2 2019 Industry Breakdown
Breaking the data down by industry, the service sector appears to be driving the national increase in sale prices. Service-oriented businesses had a 17% increase in revenue this quarter, allowing owners to sell their business for 22% more than the same time last year.
Interestingly, retail businesses saw a similar 20% revenue increase, but it only translated to a 5% growth in the sale price. Digging deeper, the median cash flow of retail businesses increased just 2.8% year-over-year, perhaps signaling the impact tariffs are having on bottom lines across the retail industry. In addition, the number of reported sold retail businesses declined near 25%, which could be a result of the well-documented difficulties in the sector as consumers shift their purchasing behavior online. Among other industries, restaurants experienced a 9% increase in revenue and a 10% increase in sale price.
For prospective buyers, the median asking price of businesses listed for-sale in Q2 increased 4.8% as a whole, but is led by manufacturing and service businesses, where asking prices rose 6% and 4% respectively. Finally, the median asking prices for restaurant and retail businesses remain unchanged versus a year ago.
Q2 2019 Top Performing Markets by Sales
At the local level, Baltimore led all markets in Q2 growth (minimum 25 transactions), more than doubling the number of sales reported compared to the same time last year. Other areas that experienced an increased number of transactions include Portland (up 71%), Seattle (up 35%), Austin (up 32%) and Dallas (up 31%).
Tampa transactions decreased the most among qualifying markets, declining 34% year over year. Other major metros experiencing a notable decline include Washington D.C. (down 32%), Atlanta (down 29%), San Francisco (down 26%), Boston (down 19%), New York (down 18%) and Chicago (down 11%).
Interestingly, of those same cities with at least 25 transactions, Tampa owners received the most for their businesses, earning a median sale price of $485,000. The higher prices in the Tampa market could be responsible for the previously mentioned decline in transactions. Other markets with a high sale price include Baltimore ($482,500), Seattle ($425,000) and Denver ($400,000). San Diego owners sold the least expensive business in Q2, taking in a median sale price of $122,000.
Q2 2019 Top Performing Markets by For-Sale Listings
Multiple major markets also saw a notable increase in the number of small businesses listed for-sale in their area during the second quarter. Albany saw the most significant growth among markets with over 100 listings, experiencing a 49% increase in available businesses. Markets that followed that trend include Oklahoma City (41%), Tulsa (38%), Bridgeport, CT (27%), Portland (27%) and Houston (23%).
Among markets that saw a decline in listings, Nashville led the way with a 20% drop, followed by Providence (down 14%), San Antonio (down 12%) and St Louis (down 11%).
For buyers interested in purchasing a business, local asking prices are always important to research. Among those notable markets that saw asking prices increase are San Antonino (18%), Baltimore (17%), Kansas City (15%) and Tampa (14%). Those metro areas with dropping asking prices include Albany (down 41%), Oklahoma City (down 22%), Tucson (down 20%) and Louisville (down 18%). In general, the highest median asking prices in the U.S. can be found in Indianapolis ($392,000), Salt Lake City ($385,000) and Kansas City ($340,000).
Q2 2019 Differences by Deal Size
While the median sale price for the businesses sold on BizBuySell in Q2 hit $270,000, 13% of those businesses closed for higher than $1 million. Owners of those businesses experienced a longer sales process (around 200 days) but were rewarded with a final sale price closer to asking. In fact, businesses over $1 million sold for roughly 98% of asking price, a much higher number than the 91% average.
These larger businesses also received a better sale price relative to their financials. The average multiple of revenue for businesses over $1 million stood at .91 in Q2, well above the .59 level for all sold businesses. Similarly, the cash flow multiple for these high-priced businesses was 3.61 as compared to 2.37 for all businesses.
Overall the market is in great position halfway through 2019. Despite a dip, transaction activity remains at high levels and the financial performance of businesses on the market has never been stronger.
Looking ahead, buyers and sellers should keep an eye on tariffs and how they might affect the market. At the moment, the Trump administration continues to stand by the imposed tariffs with China and has also discussed tariffs with other trading partners such as Mexico and the E.U.. As these issues progress, understanding a business’ supply chain will have increasing importance during a business transfer negotiation.
As we move closer to 2020, all eyes will turn to the election cycle and those in the small business community will want to pay attention to how the candidates view important issues like tariffs, taxes, minimum wage, healthcare and more. According to BizBuySell’s recent poll, small business owners appear hopeful for a re-election of the Trump administration. When asked which potential candidate would best support the small business industry, 44% said Donald Trump, with Democratic candidates like Joe Biden (9%), Bernie Sanders (4%) and Elizabeth Warren (3%) far behind.
In the short term, small business listings continue to grow as Baby Boomers reach retirement age. While buyers may be slightly more hesitant to pull the trigger than in 2018, the financial health of for-sale businesses provide plenty of incentive for prospective new owners. Those who are entering or exiting the small business market are finding success and that momentum isn’t likely to slow any time soon.
"Now halfway through 2019, there are many reasons to be excited as a buyer and as a seller," House said. "For sellers, your hard work combined with positive macro-economic conditions are yielding a greater return than years past and you should be proud to reap those rewards. As a buyer, it’s important to not be turned off by the higher sale prices, but instead take comfort in taking over a profitable business and focus on how you can make it even more efficient. It’s a great time to be an entrepreneur."
About the BizBuySell.com Insight Report
The BizBuySell Insight Report is a nationally-recognized economic indicator that tracks the health of the U.S. small business economy. Each quarter, BizBuySell analyzes sales and listing prices of small businesses across the United States based on approximately 50,000 businesses for sale and those recently sold, reporting changes in closed transaction rates, valuation multiples and other economic indicators for the small business transaction market. Closed transactions are reported to BizBuySell.com on a voluntary basis by business brokers nationwide. Each report includes real small business data on over 70 major U.S. markets and across 65 small business industries.
BizBuySell is the largest business for sale marketplace online, receiving over a million visitors a month. 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. The website also features an extensive franchise directory as well as an easy-to-use business valuation tool.
NOTE: For the most recent statistics, please see the latest BizBuySell Insights Report
Walker Sands Communications