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The latest BizBuySell Insight Report reveals 2023 first-quarter small business acquisitions bounced 4.8% over the prior quarter following three consecutive quarterly declines. Although transactions remain 10% lower than the previous year, median sale prices are up 1.4% compared to last year – 11% higher than the previous quarter.
Amid the current economic uncertainty, nearly one-third of small business owners are speeding up their exit timelines. Plus, higher acquisition costs have resulted in leverage gains for buyers.
Business Buyers Gain Leverage
Interest rate hikes have made acquisitions more costly, leading buyers to negotiate lower prices and exert pressure on business values. The median sale price of sold businesses in the first quarter of 2023 increased by only 1.4% over the previous year, while the average revenue and cash flow multiples declined by 5.7% and 3.9%, respectively.
A recent survey of business brokers revealed that 42% believe the market favors buyers, while 29% feel it is balanced, and 17% think it favors sellers. Interest rates are a key factor in these dynamics.
According to BizBuySell’s Small Business Survey, 38% of buyers feel they can get good value at favorable prices, and sellers might be more willing to negotiate rather than risk a weaker position later.
The market shift towards buyers is further supported by increasing rates on the SBA and commercial real estate sides, which impact cash flow numbers for potential buyers. Consequently, 42% of buyers say that high capital costs have delayed their purchase timeline, limiting opportunities for non-cash buyers.
Business Owners Speeding Up Their Exits
Both the global pandemic and economic disruptions have accelerated exit timelines for 28% of business owners, 44% of whom cite retirement, 30% of whom express burnout, and 21% of whom highlight economic uncertainty as their reasons for selling.
Experts, however, expect even more sellers to enter the market, as they anticipate better prices based on 2022 performance. Business owners identify inflation, recession, rising interest rates, financial concerns and hiring challenges as macro-economic factors that impacted their exit plans.
In fact, more than 40% of small business owners surveyed believe the economy already is in a recession, and 36% think it will enter one this year, prompting many to exit now rather than wait for conditions to either improve or worsen.
Business Owners Say Inflation Remains Challenging
Inflation is starting to slow. The consumer price index rose just 5% in March, the smallest year-over-year increase since May 2021. However, small businesses still are facing challenges, with 73% of owners reporting that inflation is not easing.
Restaurants, in particular, are struggling with food prices rising 8.5% year-over-year, while the cost of eating out rose 8.8% over the same period, indicating that quick-serve and fast casual restaurants were able to pass on higher costs to consumers.
Small businesses are also facing challenges with higher interest rates and difficulties hiring qualified workers. However, signs of easing inflation and a cooler labor market have been observed after the Federal Reserve’s year-long campaign of rate hikes. Likewise, while prices of goods remain elevated, almost half of business owners report that supply chain issues are easing.
Higher Value Business Deals on the Market for Longer
During 2023’s first quarter, businesses that sold for $1 million or more had a median cash flow of $560,473, and they were on the market for 211 days, on average, compared to $125,348 and 176 days, respectively, for businesses with a deal size less than $1 million. The 211 median days on the market represent a slight increase from the prior quarter, and it marks the third consecutive quarter of longer sale timeframes for these higher-value businesses.
The group of larger transactions also had higher revenue and cash flow multiples than the smaller transactions. Almost half of these higher-value acquisitions occurred in the service industry, followed by the retail, manufacturing and restaurant sectors.
Market Outlook
The small business market is expected to face ongoing challenges in the next two quarters due to inflation and higher interest rates. However, recent activity suggests that the market is beginning to adjust to current economic conditions. Experts anticipate that high rates will continue, and sellers will be motivated to sell their businesses before a potential recession reduces their profits and valuations.
While the labor market is expected to ease somewhat, buying a business and putting effort into it may be one of the few safe havens for generating a positive return in today’s market. Instead, buying a thriving or consistent business is a safer option than investing in the stock market or real estate, which can be risky depending on the location.
Buyers Motivated by Emerging Opportunities
As the labor market softens and investors adjust to higher interest rates, demand is expected to remain strong as buyers continue seeking new opportunities. Some investors could shift their focuses to acquisition mode, leading to slightly increased buyer activity throughout 2023.
Although high interest rates have presented challenges, 38% of buyers still believe they can get a good value at a favorable price. Furthermore, 45% of buyers are motivated to leave the corporate world and be in control of their futures, while 48% prefer stable, recession-resistant businesses.
Many buyers also are seeking to diversify their income streams by purchasing a business in addition to their current employment. Rather than wait for conditions to improve, 30% of buyers expect to find unique opportunities, including business owners looking to retire who either do not have children to take over the business or have children who are not interested.
More Baby Boomers Expected to Fuel the Market with Available Businesses
As aging Baby Boomers step off the sidelines, the supply of available businesses is expected to grow throughout the year. For many, this is their window of opportunity to find a buyer and still receive a favorable price after weathering through the pandemic. However, carrying some portion of the financing might be the best option to achieve their goals.
Experts anticipate that more inventory will hit the market toward the end of the second quarter or early in the third quarter, depending on lending conditions. There are plenty of motivated buyers ready to underwrite a deal at any given moment, so hopefully sellers will recognize this opportunity and take advantage of the current market conditions.
Image: Depositphotos
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