Small Business Transaction Growth Continues, Up More Than 41% from Same Time Last Year
BizBuySell.com Insight Report shows significant spike in business sales for third straight quarter with restaurant, retail industries leading growth.
BizBuySell.com the Internet’s largest business-for-sale marketplace, reported today that small business transactions jumped 41.7% in the third quarter of 2013 as compared to the same period of 2012. The restaurant and retail categories led the way, as restaurant transactions increased 109.4% from Q3 2012 and retail transactions increased 60.9% from Q3 2012.
In total, 1,685 closed transactions were reported in Q3 2013, a significant spike over the 1,189 transactions recorded in Q3 of 2012. The results are included in BizBuySell.com’s Third Quarter 2013 Insight Report, which aggregates business-for-sale transactions reported by participating business brokers nationwide.
Small business sales have continued to improve through 2013 and into the Third Quarter as a result of the improving overall economy, strong supply and demand fundamentals (i.e., an aging business owner demographic and an increase in the number of qualified business buyers) and continued improvement in small business performance.
After years of limited supply and demand in the small business market, both are picking up as the economic recovery is starting to take hold. Many Baby Boomers have been looking to exit their business and retire for some time now, but either haven’t been able to close the sale or have delayed selling in hopes of a higher price once their business performance and the economy recovered. The confidence of such owners that they can now receive an appropriate sales price in a reasonable time appears to have blossomed and supply is coming onto the market. Indeed, according to BizBuySell’s recent Buyer and Seller Confidence Survey, 70% of current small business sellers expect to be able to sell their business within one year of listing it.
In terms of demand, buyers who wanted to purchase a business became understandably hesitant once the Great Recession hit in 2008. They either did not have the confidence to purchase a business in such an uncertain economic environment or found that acquisition financing was not available and that their own financial resources were weakened. However, the upturn in economic activity and personal wealth, combined with continued improvement in small business health, have increased buyer confidence that they can find a sustainable and growing business to buy and do so in a reasonable amount of time. In fact, according to BizBuySell’s recent Buyer and Seller Confidence Survey, 88% of prospective buyers consider themselves in the market to purchase a small business within the next 1-2 years.
“When the recession hit in 2008, many buyers and sellers were forced to exit the marketplace simply because conditions for small business transactions were very challenging,” Curtis Kroeker, Group General Manager of BizBuySell.com and BizQuest.com, said. “However, as the economy improves, small business performance continues to gain steam and financing availability improves, more buyers and sellers are emerging to pursue what they had hoped to do some time ago.”
Restaurant and Retail Categories Drive Market Growth
Restaurant and retail transactions are the key driving forces behind Q3’s large increase in total transactions. Compared to overall business transactions, which increased 41.7%, restaurant transactions increased 109.4% from Q3 2012 and retail transactions increased 60.9% from Q3 2012. Restaurants and retail transactions combined accounted for 54% of all transactions in Q3 vs. 43% a year ago.
The strong growth in restaurant transactions may be related to lower cash flow multiples. In Q3, the average sales price of restaurants as a multiple of cash flow was 1.83, down from 2.08 in Q3 2012. This multiple is below that seen for small businesses in general in Q3 (2.19), meaning that restaurant buyers are getting more cash flow per dollar of investment.
Strong year-over-year transaction growth in the retail category could be linked to the financial strength of these businesses. In Q3, the average median revenue for retail businesses rose to $520,000 from $423,015 a year ago, a 22.9% year-over-year increase. Both average sales price and asking price also increased, with average sales price increasing 9% to $180,000 from $165,000 and average asking price increasing 2.6% to $200,000 from $195,000.
Small Business Financials Continue to Improve
The trend of continued small business health improvement continued in Q3. According to BizBuySell’s third quarter data, median revenue jumped to $420,000, an 8.9% increase over the $385,327 figure reported in Q3 2012 and a 6.7% increase over the $393,700 figure recorded in Q2 2013. Cash flow also grew increasing 5.4% quarter-over-quarter to $98,034 from $93,000 in Q2 2013 and 3.4% year-over-year from $94,880 in Q3 2012.
The steady improvement in small business financial health is allowing business owners to gradually ask for more money from buyers, who appear willing to pay. The median asking price for businesses sold in Q3 was $199,000, a 2.1% increase over Q2 2013, and the median sale price rose to $180,000, up 2.9% from Q2 2013.
“We’ve been watching small business performance improve since Q3 2010 and waiting for transaction growth to resume. In 2013, it appears that the conditions are finally coming together to unlock latent potential. Additionally, Q3 2013 marks the fifth straight quarter that both asking and sale prices are up nicely year-over-year showing that strengthening performance is translating into more money in sellers’ pockets,” said Kroeker. “On the other side, buyers are taking notice of the improving business financials and this, plus sale price multiples that are still low by historical standards, is giving them the confidence needed to take the entrepreneurial path and seize the opportunity presented by what will hopefully be a long-term market recovery.”
Outlook for remainder of 2013
2013 has seen strengthening overall economic health, business-for-sale transaction volume, and small business financials – all of which are appear poised to continue in Q4 and into 2014.
It is worth noting that the 20% quarter-over-quarter decrease in closed transactions seen in Q3 2013 should not be interpreted as a weakening of fundamentals. Rather, this decrease is most likely due to the fact that many business owners were motivated to sell by the tax implications of the fiscal cliff at the end of 2012 and this supply uptick has likely worked its way through the system. Many owners started the sale process in 2012, but were not able to close the sale until the first half of 2013 (selling a business typically takes six months or more), further bolstering transaction volume in both Q1 and Q2 of 2013.
The outlook for the rest of 2013 and early 2014 remains positive, although some uncertainty can be expected as business owners watch key economic issues like the government shutdown, debt-ceiling crisis and overall stock and housing market performance. If the market is able to withstand the uncertainty that accompanies these issues, it will be clear that small business health, and as a result, the business-for-sale market, is growing stronger. However, decreased activity would suggest that business owners and buyers are still skeptical about the long-term sustainability of improving economic conditions.
“Overall, the fundamentals are promising. Small business health is improving and both supply and demand are strong,” says Kroeker. “While some uncertainties lie ahead, we expect to see business health continue to improve and transaction volume remain brisk.”
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About the Insight Reports
The BizBuySell Insight Report is a nationally-recognized economic indicator that tracks the health of the U.S. small business economy. Each quarter, BizBuySell analyzes sales and listing prices of small businesses across the United States based on approximately 40,000 businesses for sale and those recently sold. The BizBuySell Insight Reports focus on over 70 major U.S. markets and publish local, regional, state and national data for trending and analysis.
An expert on small business issues, Group General Manager of BizBuySell.com and BizQuest.com, Curtis Kroeker, discusses the trends revealed by the Insight Reports in various media outlets.