Will the upcoming election influence the sale of small businesses?
New research from BizBuySell.com has revealed that, during the first half of 2016, the total number of small business sales has not only increased from last year, but it has also surpassed the record-setting numbers in 2014.
A total of 1,935 closed transactions were reported in the second quarter of 2016, bringing the year-to-date total to 3,775, a slight improvement from the 3,743 reported in the first half of 2015. If this pace holds up, 2016 is also on track to surpass 2014, when BizBuySell reported a record 3,755 transactions in the first half of that year.
Key financials of those businesses sold in 2016 remain on par with those reported sold in 2015. The median revenue of sold businesses in quarter two 2016 was $441,331, a 2% drop from the same period last year, while the median cash flow grew 2%, from $102,995 in quarter two 2015 to $105,000 in quarter two 2016. Consistent financials led to a median sale price of $199,000, nearly identical to the $200,000 2015 mid-year level.
The full results are included in BizBuySell’s Q2 2016 Insight Report, which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide.
“The fact that small business financials have remained stable and transactions continue to grow speaks to the strong number of buyers and sellers entering today’s market,” said Bob House, president of BizBuySell.com and BizQuest.com. “Despite the many deals already completed over the past few years, there still appears to be a strong supply of listings, driven by retiring baby boomers, and at the same time, qualified buyers with access to capital.”
Time Small Businesses Are on Market Sits Just Below Six Months
Small businesses sold in quarter two 2016 reported a median of 178 days on market, a slight improvement from the 188 days in the previous quarter, but an 8% increase from the prior year of 163 days. This puts the average time to market a small business at approximately six months. In addition, experts suggest sellers spend a minimum of six months preparing their business for sale in advance of listing it. This includes preparing two to three years of financials, optimizing operational efficiencies and improving the appearance of the business. This process helps sellers achieve the highest possible return.
Furthermore, it’s no coincidence that a large number of transactions typically occur in the second quarter of the year, as the six-month metric shows these owners likely listed their business for sale just after the new year. This is often when sellers act to initiate financial plans that were considered the prior year, including the decision to engage in a lifestyle changes. These lifestyle changes primarily include retirement and burnout, as reported in BizBuySell’s recent study, The Demographics of U.S. Small Business Buyers & Sellers.
“The timing of a small business sale is an especially tricky topic as there are certainly variables that can slow or speed the process,” House said. “Using this data as a benchmark however, sellers should expect it to take about one year from the decision to sell to the point where they actually find a buyer for their business. This provides sufficient time for preparation, marketing and securing a buyer.”
As Asking Prices Have Risen, Time on Market Has Increased
Looking at the bigger picture of small business sale timelines, it appears that while sale prices have increased over the last six quarters, the sales cycle has lengthened. Whether this is correlation, causation or coincidence is not clear, but it is interesting and worth noting for sellers.
The time to sell a small business coming out the recession peaked at over 200 days in 2012. As economic conditions improved, that number slowly declined as both buyers and sellers were likely eager to move after waiting out the recession. After 10 straight quarters of faster sales cycles, the time to sell started increasing in quarter four 2014, just after the median asking prices began to increase. In fact, after sitting at $200,000 in quarter three of 2014, the median asking price of sold business gradually increased to a high point of $249,500 last quarter. Simultaneously, the median time on market rose from a low of 154 days in quarter four 2014 to 188 days last quarter.
Remainder of 2016 Remains Good Time to Buy or Sell, Election Among Key Issues to Watch
In addition to the growing transaction numbers and stable financials, the multiples today’s owners receive for their business remains strong. The average revenue multiple remained almost identical to last year at 0.61 and the average cash flow multiple was 2.26, just slightly down from 2.22 in 2015. The minimal year-over-year variations point to a stable market.
As we move closer to the fall, the Presidential election will no doubt be on many small business owners’ minds. The winner’s small business policies will shape the future of SMB regulations and could cause a shift in the number of owners looking to either sell or hold on to their business. For those business owners with overseas reach, the effect of “Brexit” and the ensuing regulation changes is another issue owners should consider while determining their future plans.
“While we’ve seen few significant fluctuations in the business-for-sale market over the past few years, the election could certainly change that in late 2016,” House added. “Many people could be motivated to either enter or exit small business ownership based on their view of the winner’s future policies. It’s something we will be watching closing in our second half Insight reports.”
Convenience Store Specifics
When it comes to the number of convenience stores that are changing hands this year, numbers are slightly down from last year, as the current total is 144, while by the end of the second quarter last year 157 convenience stores had changed hands. Some 85 convenience stores were sold in the first quarter of 2016, and 59 were sold in the second, while 87 were sold in the first quarter of 2015 and 70 were sold in the second quarter. What’s odd is that the median asking price for convenience stores in both the first and second quarters this year has decreased dramatically from last year, as have the median sales prices.
Last year, the median asking prices for the first and second quarters were $222,500 and $159,000, respectively, while this year the median asking prices for the first and second quarters were $162,000 and $117,000, respectively. As for sale prices, last year the median for the first quarter was $195,000 and $129,500 during the second quarter, while this year the first quarter median sale price was $153,000 and it was only $99,500 for the second quarter.