What's Driving the Business-for-Sale Rebound?
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We certainly know 2009 was not a good year to sell for most owners who wanted to exit their businesses. In fact, closed business-for-sale transactions in the United States declined by 28 percent in 2009, according to a recent report.
The good news, is that 2010 shows strong potential for being a much better year for the business-for-sale market.
Indeed, the latter part of 2009 demonstrated clear signs of recovery that began mid-year. In fourth quarter 2009, the median closed-transaction sale price rose to $180,000--up from $177,500 a year ago at the same time--a level we have not seen since mid-2008. This represented a 1.4 percent year-over-year increase in median sale prices. To put that in perspective, the three prior quarters had each recorded year-over-year declines of 15 percent or more.
Data from a BizBuySell.com study shows similar signs of strength emerging in other key metrics, from the number of transactions completed to the multiples used for valuing a business. Long story short, there are ample signs of recovery and there is growing momentum, all of which leads those of us in the industry to be cautiously optimistic about the prospects for 2010 business-for-sale activity.
What's Driving the Rebound?
There are two driving forces behind the improving market. First is an increased demand for small businesses due to high unemployment rates, with unemployed individuals opting to give entrepreneurship a try rather than seeking a return to a traditional corporate job. Second is the return of capital to the market, which gives potential buyers the ability to finance the purchase of a small business.
Additionally, businesses that require smaller levels of capital investment, including select service businesses and restaurants, are helping to lead the evolving recovery in the business-for-sale marketplace. Business owners and buyers in these two sectors are seeing an opportunity to transact that wasn't there six months ago. Restaurant sales were up one percent in the fourth quarter versus a year ago. While service business sales declined by only four percent, an encouraging figure in comparison to the 27 percent decline in sales of manufacturing companies and the 20 percent average sales decline reported in other industries.
What the Future Holds
Overall, 2010 is shaping up to be a much more productive year for small business transactions and we anticipate slow but consistent recovery throughout the year. Here are some key industry drivers that will help lead a resurgence in business-for-sale activity in 2010 and beyond:
- Latent supply: Throughout the recession, small-business owners have focused on running their businesses and staying afloat. Exit planning and considering the worth of their business were of little concern and the number of businesses for sale declined significantly. As the economy continues to improve, however, the latent supply of businesses will hit the for-sale market and generate a flurry of new activity.
- Unemployed Workers Seeking Jobs: Although the U.S. unemployment rate dropped to 9.7 percent last month, the number of Americans seeking employment is still at record high levels. As more time passes without the unemployed finding work, more workers will seek to replace their income with a small business purchase. The energy and passion of these new entrepreneurs should not be underestimated. New business owners bring forth new ideas, new innovations, new investment and new jobs to the companies they acquire. It is critical that we make it easier for would-be business buyers to become thriving business owners.
- Easing Credit: As the supply and demand for small business transactions continues to grow, the availability of purchase capital will be the critical element that determines the market's return to health. On the bright side, the federal government and U.S. Small Business Administration are currently assisting banks by easing their lending restrictions and by making more capital available to the small business market.
- Baby Boomer Retirees: The U.S. baby boomer generation is reaching retirement age, a trend that will continue for another decade. This means the number of small-business owners seeking to sell their business and retire is increasing. As a result, an above-average number of small businesses will be available for sale in the years ahead.
It would be nice to see a more proactive approach on the part of policymakers to help speed the recovery of the business-for-sale market. After all, the U.S. economy relies heavily on the success of small business. The small business economy, in turn, is largely powered by the ability for those businesses to change hands, allowing existing jobs to be maintained and offering new business owners the opportunity to invest in additional employment and economic growth.
While there are emerging signs of recovery in terms of the number of small business transactions and a decrease in small business prices, the federal government, the SBA and the banking community must all still take steps to reinvigorate the flow of small business capital to fund business transactions.
Policy and regulations aside, for individual business owners it's time to focus on your exit strategy. Would-be sellers should take advantage of the rising tide by getting ready to sell and then listing their businesses for sale.
Remember, preparing your business for sale takes time and a listed business will typically take five to twelve months to sell. If you want to sell within the next two years, you need to start the process now.