Small business acquisitions decreased by 3% during the second quarter of 2022 while the median sale price slipped 9% below the previous quarter, a drop from $345,000 to $315,000.
Sales of Businesses Slowing Due to Rate Hikes and Inflation
The acquisitions figure is less of a worry as it is still a gain of 14% year-on-year which indicates that a strong market is navigating the economic fluctuations well enough. The median sale price also seems quite a big drop-off, but it is still just 2% below last year’s median sale price of $320,000, according to data from the BizBuySell Insight Report which tracks and analyzes business-for-sale transactions as well as the sentiment of business owners, buyers, and brokers.
‘Realistic Prices’ Driving Sale Price Dip
The sale price dip seems to be driven by more realistic prices being applied by retailers, as indicated by a 3% quarter-on-quarter drop in average cash flow amounts. There are also ongoing concerns regarding inflation and recession.
It appears that rising costs are putting the squeeze on business financial performance, with the price of acquisitions seeing higher interest rates to add to the economic uncertainty. Labor market challenges are also continuing to hold back small business growth.
Buyers Seeking a ‘Faster Close’ to Lock-in Interest Rates
Publishing their Insight Report findings, BizBuySell said: “Market performance continues to match and, in many cases, outperform pre-pandemic levels. Businesses sold at a median price 17% higher compared to Q2 2019 and possessed stronger financials, with median revenue 16% higher, and median cash flow 15% higher, respectively. Moreover, businesses sold at a faster pace. The median days on the market dropped 6% in Q2 over the previous quarter from 181 to 171 days. With the Federal Reserve rapidly increasing interest rates, it is likely buyers in today’s market are seeking a faster close to lock-in lower interest rates.
“Transactions still lag pre-pandemic levels by a small margin. The 2,342 businesses reported as sold in Q2 2022 is 4% shy of the 2,446 sold at the same time in 2019. Growth over the next few quarters likely hinges on several micro and macro factors. These range from the Fed’s success of a ‘soft landing’ to whether the anticipated ‘Silver Tsunami’ of Baby Boomers decide now is the time to exit.”
The owner of Horizon Business Brokers in Virginia, Dustin Zeher, says he has yet to notice a dip in prices for businesses in his market, but is expecting them soon. Zeher said: “I have not yet noticed any dips in sale prices. However, I am expecting them to start. Not only due to potentially falling cash flow, but due to the higher cost of the acquisition. With interest rates increasing the overall cost of the transaction, buyers will offer less to try and maintain a good ROI for the risk of their capital and time.”
Sellers Also Becoming More Cautious
The Insight Report also revealed that buyers are not alone in their caution, with inflation and interest rate hikes causing sellers to be more realistic about valuation and asking price.
A total of 40% of the business owners surveyed for the Insight Report believe they would have received a higher price for their business had they sold it last year.
Higher interest rates raise the “cost” of anything that is debt-financed, including business sales. Same story for credit card debt, houses, cars, etc. This is what the Fed is trying to accomplish.