Just how much prices for existing businesses are up is an open question--there are no centralized statistics. But some business brokers offer insight. Business Brokers Network in Dallas, for instance, estimates the average price for the 1,000 businesses it sold last year rose about 10 percent over the prior year, a likely reflection of prices nationally, says company president Gerrald Nance. His 450 affiliates sell midsized companies, which last year had an average price of $400,000 each.
At the lower end of the market, the story is similar. Steve Benson of VR Business Brokers in Huntington Beach, California, reports that his company saw an average 9 percent price increase in businesses sold last year--from $146,000 in 1997 to $160,000 in 1998. (The company declines to disclose the number of sales.) And at Sunbelt Business Brokers Network Inc. in Charleston, South Carolina, the average price for businesses sold jumped substantially more last year--about 23 percent to $185,000. But president Edward T. Pendarvis explains that the company, which sold 3,000 businesses in 1998, had courted larger businesses than in the past, thus skewing the numbers upward.
In any case, the price trend is clearly running far ahead of inflation. Today's stronger business results are increasing valuations, asking prices and buyers' willingness to ante up, the brokers agree. But apart from the push by economic fundamentals, there's another reason prices are going up. Says Pendarvis, "The main thing driving price increases is corporate downsizing and the lack of job security--people know they're not going to be at one company for 30 years and then retire." Nance agrees, citing a flight from corporate America into small business over the past five years as a key factor in increasing demand and therefore higher prices being paid for existing businesses.
Benson also believes the reduction in long-term capital gains taxes from 28 to 20 percent has made owners a bit less willing to hang on. Nance says the tax issue means little at the lower end but increases in importance with the size of a business. "[Many entrepreneurs] are unschooled in the details of finance," Nance says. "They'll sell when they get burned out, not because of tax advantages."
Stephen B. Sherretta, a freelance business writer in Philadelphia, is a former writer and editor with The Economist Group and the Financial Times in London.
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The top five categories of small businesses sold in 1998 were:
1. Service (nonfood)
3. Retail (including mail order)
VR Business Brokers, (714) 375-7175, http://www.vrbusinessbrokers.com