News from Henry

Why the Market for Buying and Selling a Business is Improving

While the post-recession business-for-sale market has generally favored buyers, there are several signs that we’re experiencing a shift towards a more balanced market.

Early 2015 data shows an improvement in the overall financial health of small businesses and an uptick in the pace of small business transactions.

In fact, data from BizBuySell.com’s most recent Q1 2015 Insight Report showed a 6 percent year-over-year increase in business transactions, which marks two years of consistent financial improvement in the business-for-sale market.

Several factors contribute to market conditions that benefit buyers and sellers alike:

  1. Improving financial health

The financial performance of small businesses has been strong in recent months, which is allowing sellers to both ask for and receive higher prices for their businesses. The median asking price of a small business in Q1 was $225,000, up significantly from the $199,000 median asking price recorded at the same time last year. The median sale price in Q1 of 2015 also increased to $200,000, compared to $175,000 in Q1 of 2014.

Strong revenue and cash flow are also indicative of an improving small-business environment. The median revenue of small businesses sold on BizBuySell.com spiked in mid-2014 and has remained strong since, hovering just below $450,000.

Similarly, the median cash flow of sold businesses came in at $104,000, which is the highest median cash flow since BizBuySell started tracking financial data in 2007. These numbers make it easier for buyers to justify investments in new companies.

Conditions are especially favorable right now for those looking to enter or exit the small business retail or service sector. In Q1 of 2015, transactions within the service industry increased by 18 percent from Q1 in 2014. Sales of Midwest service companies in particular rose 63 percent from last year. The median revenue of retail businesses sold jumped from $437,783 in Q1 of 2014 to $537,500 at the same point in 2015, and the median cash flow also rose from $80,907 to $99,355.

Impressive financial indicators in these two sectors allow sellers to raise their asking prices and sell their businesses for more.

  1. Growing supply and demand

Recent BizBuySell surveys of buyers, sellers and business brokers credited the uptick in small business transactions to growing supply and demand in the business-for-sale-market. Retiring baby boomers, in particular, account for many of the new sellers in the market. More than 78 percent of business brokers surveyed attributed at least a quarter of their closed transactions to baby boomer sellers.

At the same time, as the national and global economies continue to rebound, potential business buyers’ personal wealth and willingness to take on new ventures has grown as well. Relaxed lending policies, a rise in financing options, and a booming stock market are all providing buyers with the capital and confidence needed to kick start their small business ownership plans.

Not surprisingly, these new buyers are coming from a younger generation now ready to start their entrepreneurial journey, typically by taking over from retiring owners. About 75 percent of business brokers in the aforementioned survey indicated the average buyer age to be between 30 and 49, while sellers were most likely to be between 50 and 64 years old.

  1. A more balanced market

This steady supply and demand of businesses is creating a balanced market, where both buyers and sellers receive value from transactions.

Sales price multiples for both median revenue and cash flow are trending upwards. The median revenue multiple for sold businesses in early 2015 was 0.63, up from 0.59 at the same time last year. The median cash flow multiple also grew slightly from 2.21 in Q1 2014 to 2.27 in Q1 2015. The current market landscape is expected to continue to drive interested buyers and sellers to the table throughout the remainder of 2015.

In general, the more balanced business-for-sale market offers benefits for buyers and sellers. Transaction activity has been consistently strong since the beginning of 2013, with the financial performance of small businesses being particularly robust in recent months. At the same time, more qualified buyers are ready to start their entrepreneurial journey and more sellers are eager to exit their small business and move on to the next chapter. Combined, there’s no better time than the present to capitalize on the market.

Bob House, General Manager for BizBuySell.com