The second quarter of 2023 saw steady growth in small business transactions, despite the challenges posed by higher interest rates and inflation. BizBuySell’s Insight Report tracks and analyzes U.S. business-for-sale transactions and sentiment from surveys of business owners, buyers, and brokers; business acquisitions climbed 8% QOQ, following a 4.8% gain in Q1. This indicates that market participants adapt to the new economic environment and find creative ways to close deals.
However, the higher cost of capital has also put pressure on business values as financing deals have become more costly. The median sale price in Q2 dropped 14% to $300,000 from the previous quarter, with the median asking price in Q2 down 8% over the same period. The average revenue multiple declined by 3.3% from the previous quarter, while the average cashflow multiple declined 1.3%.
Many deals are getting more creative regarding deal structure and seller financing to bridge the gap between buyers and sellers. For example, some sellers are willing to reduce the business price but make up for it on real estate or rent if they own the property where the business operates. Others offer seller financing as a sign of confidence in their business and as a way to get more for their business with interest payments.
Seller financing is also becoming more popular among buyers and lenders, as it reduces the risk and exposure of the deal. According to BizBuySell’s survey, 70% of buyers intend to ask the seller to finance part of the deal, while 43% intend to use an SBA or traditional bank loan6. However, only 22% of sellers plan to offer seller financing, with an additional 28% undecided. This suggests that sellers still have room for negotiation and education on the benefits of seller financing.
Making a Comeback
The report also reveals some interesting trends across different sectors and regions. Restaurants have been making a comeback since the pandemic, with transactions rising 10.3% in Q2 over the previous year. Restaurants that sold in Q2 generated more revenue, and buyers paid more for them, with median sale price up 15.9% over the previous quarter and median revenue up 10% over the previous quarter. However, restaurants still face challenges such as higher food and labor costs and competition from online delivery services.
On the other hand, retail businesses have shown declining numbers in Q2, with transactions down 12.3%, sale prices down 22%, revenue down 24%, and cash flow down 9.4% compared to the previous year. The shift to online shopping, inflation, and changing consumer preferences has affected the retail sector. Some retail businesses may represent takeover targets by competitors or new entrants who can leverage their assets and location.
The report also highlights the increasing number of individuals who are embracing entrepreneurship over traditional employment. Many buyers are motivated by the desire to be more in control of their future, especially after experiencing job loss or stagnation during the pandemic. Some buyers are also retired baby boomers who are looking for a new venture. Service businesses are particularly popular among buyers, offering stability and recurring income.
Small Business Deals
The small business market is strongly influenced by interest rates, which affect the availability and affordability of financing. The Federal Reserve paused rate hikes in June after ten consecutive increases, but many economists expect another increase as soon as July. The Fed’s decision will depend on various factors such as job growth, inflation, and consumer spending.
For sellers who are ready to exit, experts recommend that they understand their business value, justify their price, and be flexible with deal terms. They also advise sellers to get their books in order, hire a professional broker, and plan ahead for a smooth transition.
For buyers looking for opportunities, experts suggest they do their due diligence, seek financing options, and find a business that matches their goals and lifestyle. They also encourage buyers to act fast when they find a good deal, as the market is competitive and dynamic.
The BizBuySell Insight Report is a valuable source of information for anyone interested in buying or selling a small business. It provides data on over 70 major U.S. markets and across 65 small business industries based on approximately 50,000 businesses for sale and those recently sold. It also offers insights from surveys of business owners, buyers, and brokers on their motivations, challenges, and expectations.