Uptick in Businesses Being Sold, but Prices are Dropping
In the business-for-sale market there’s good news and bad news.
First the good news: things are not as bad in the 3rd quarter of 2009 as they were in the 2nd quarter. (Well, I guess that’s good news!)
According to BizBuySell, an online marketplace for the purchase and sale of small businesses, more businesses were sold in the 3rd quarter of 2009 compared to the 2nd quarter:
“After multiple quarters of declining business-for-sale transactions, the new numbers suggest that the state of the small business economy is finally beginning to improve.
BizBuySell.com’s new Third Quarter 2009 Insight Report shows a 24% year-over-year drop in closed small business transactions. While still lagging behind year-ago transaction numbers, BizBuySell.com’s previous report — which included data for the second quarter of 2009 — showed a dramatic 50% decline in closed business-for-sale transactions when compared to the same time period in 2008. Closed transactions are reported to BizBuySell.com by business brokers nationwide.
BizBuySell.com’s quarter-over-quarter data also supports the rebound in the business-for-sale marketplace. The number of closed transactions reported in the third quarter increased by 7.4% as compared to second quarter transactions. Just one year earlier, when the recession was hitting its stride, that same quarter-over-quarter statistic dropped 30%.”
Here’s some more good /bad news: prices are down. In fact, prices are so low you could call them bargain-basement. Again from BizBuySell:
“BizBuySell.com’s third quarter data suggests that business sellers are dropping their prices, which is making it possible for more deals to close. For example, the median sale price for closed transactions fell to $149,000 from $189,500 year-over-year, a 21.4% decline in price.
The metrics used to value companies have seen a similarly dramatic downward trend. Revenue multiples on reported closed transactions dropped 9.6% to .62 in the third quarter of 2009, and cash flow multiples dropped to 2.44, a 12.2% year-over-year decrease. The revenue and cash flow multiples are calculated by dividing the selling price of the business by its reported annual revenue or cash flow.”
Keep in mind that we are talking about fairly small businesses. The median selling price for a business nationwide in the United States for the third quarter of 2009 was $149,000. The median revenue for those sold businesses was $328,704.
According to the BizBuySell data that I examined going back to the beginning of 2007, that median selling price of $149,000 is the lowest point. By comparison, the median selling price for a business in the first quarter of 2008 was $200,000.
So, what’s it mean for you? It all depends on which side of a transaction you are on:
- Sellers: If you are a seller, you are faced with a market that while rebounding, is still down compared with a year earlier. There is a smaller pool of buyers. If you HAVE to sell now you may not get the price you hoped for — not so good if you need to exit your business quickly. But if you can wait it out another quarter or half a year, there’s light ahead. It looks like the market is improving. The business-for-sale market is likely to show continued signs of recovery in late 2009 and the first quarter of 2010, as the economy overall improves.
- Buyers: If you are looking to buy a small business, there are bargains to be had. Sellers may be eager to sell; many have cut their prices or are open to low offers. As a buyer you may be able to get a business at a significant discount compared to 18 months ago. However, you may find it still challenging to secure financing to buy a business. On the other hand, some sellers may be more willing to provide you advantageous terms, such as extended payment terms or seller-financing.
Like I said, it’s a mix of good news and bad news, depending on which side of the table you sit.
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Anita,
Do you have a figure of how many businesses / companies that are bought and sold every year? How many businesses change hands during a year?
Hi Martin,
I’ve looked for that particular statistic before — without any luck. The best anyone can do is estimate the number of businesses sold. One statistic that I reported about 5 years ago was that 1.7 million businesses are for sale at any given time.
BizBuySell is the largest online marketplace, and according to the numbers they shared with me, about 6,500 transactions closed on their marketplace during 2008. Of course, that’s a small percentage of the overall number of transactions.
- Anita
Whaaargubl? (Plaintive Bark of bafflement) The price of something is lowered and more of it is purchased! Oh, if only there was a simple economic principle to explain this uncanny phenomenon!
What it means is this: people are clinging to their businesses less tightly. They are letting go of unfulfillable Desire for the businesses to “succeed.” They are freeing themselves of the suffering that arises from such egotistical Desire. They are opening themselves to accept what is – meaning, whatever the Universe send to them. They are learning how to be truly happy.
When you stop clinging to things that aren’t truly yours (http://is.gd/46W8w) then you have nothing to fear losing. When fear dies, only natural happiness remains.
With the tightening of the credit market it doesn’t surprise me that fewer deals are getting done and that the deals getting done are smaller. It’s hard to get banks to take on the risk of a $150K+ loan on a small business in what is perceived as a struggling economy.
Barking Unicorn, thanks for the philosophical whatever …
Robert, true. And there’s another thing going on: it’s probably the weakest businesses being sold in these circumstances … where the sellers have no choice but to sell. A seller with a solid business is probably biding his or her time until the market improves.
- Anita
Anita,
Thanks for your reply. Do you have to register to a certain institutions if you sell your business? In Sweden you have companies registration office for businesses. They publish all public news about companies, e.g., bankruptcies, new registrations in an official gazette paper (oldest newspaper in circulation, started 1645).
My opinion for why valuations are down has everything to do with the discount rate attached to small business transactions. Discount rates are loaded with a risk premium based on many factors. The main issue – there is less confidence in small business’ ability to generate future cash flows. As such, the discount rate in a standard cash flow valuation model is higher than it was a couple of years ago, driving valuations down.
Hi Ken, good point — lots of buyers buy based on a cash-flow valuation.
- Anita
Hi Anita,
I would consider this particular piece of news as a sign of things coming back to normality but with a slightly different perspective. The decrease in the magnitude of drop suggests that lesser business owners are facing a situation whereby the have to sell their business which is a positive thing. But the continuing drop in the valuation multiples for these businesses suggest that there is still an excess of supply of people facing low profitability and thus resorting to sale of their business than demand of people willing to take the risk of inorganic route for increasing their existing profitability.