Navigating Today’s Business-For-Sale Environment
We understand that most people do not have time to monitor everything that is happening in the market. So, to make things easier, we have compiled a brief report on last year’s business sales and the current economic outlook.
A record number of small businesses were bought and sold in America in 2016, topping 2015’s totals by 8.6 percent and 2014’s previous high by 4.6 percent. Will this momentum be sustained? According to Deloitte’s year-end report “activity is poised to accelerate, perhaps significantly.” Primary factors for the bullish outlook are stock prices at historic levels, interest rates… despite the forecast for an increase…remain near or at historic lows, an improving business environment, more qualified buyers on the market, and much improved financing options.
The following data shows a snapshot of 2016 market statistics for the Greater Houston Metro Area. A total of 66 U.S. metro areas were represented in a report by BizBuySell from data provided by Business Brokers. Most businesses are valued based on a multiple of adjusted earnings.
- 580 businesses were listed for sale, the 14th highest number of listings
- The average multiple of earnings for asking price was 3.25, the 13th highest asking price multiple
- 119 businesses were sold, the 18th highest number sold. They sold at an average of 95% of asking price
- The average multiple of earnings for those businesses sold was 2.01, 44th place in the multiple of earnings
- On average, nationally, the time it took for a business to sell dropped to 160 days, a 11.6% drop from the previous year
- The highest average valuations expressed as multiple earnings were reported in Winston-Salem, North Carolina. Surprisingly, businesses in the high-cost state of Connecticut sold for lowest valuations in the country.
- According to the report, 70 percent of the business brokers surveyed said that at least a quarter of their closed sales were related to baby boomers and 98 percent of those brokers expect this trend to continue throughout 2017
This data indicates that many businesses were overpriced since out of 580 businesses listed only 21% were sold. Unfortunately, this is not surprising, this statistic is normal. Historically, only about 20% to 25% of businesses that go to market actually sell. Even of firms that are considered mid-sized (businesses with sales of $10 to $50 million and 100 to 500 employees) only 50% will sell. Why are the percentages so low? There are many reasons, but here are a few.
1) Overvaluation. Many sellers want to “test the waters” and overprice the business. Today’s buyer is educated and usually business-savvy. There is so much pricing data available. Buyers know when a business is overpriced.
2) Sellers are not willing to finance a portion of the sale price. If the business does not qualify for SBA lending, most buyers are not willing or are unable to pay 100% cash to make the acquisition. In many cases the seller will be called upon to assist in the financing. Studies have shown that sellers who are willing to finance a portion of the purchase price will receive a higher price.
3) Declining business revenues
4) Sellers are not willing to negotiate
5) Inaccurate financial records that don’t pass buyer’s due diligence.
6) Sellers get cold feet and withdraw from the market.
7) Sellers, too often, listen to well-meaning outside relatives, friends or advisors who really don’t have sufficient knowledge of the selling process. Sellers who don’t use a professional business broker/intermediary are at a disadvantage. These outside professionals know the marketplace and greatly assist in finding the right buyer. They are a “value-added” service and will more than justify their fee. The seller who represents himself or herself will almost never get the price that a business broker professional will obtain.
% Sold Nationally By Industry Sector
29% Restaurants, Bars, & Fast Food
4% Dry Cleaning, Laundry Services
4% Convenience Stores
4% Health, Medical, Dental
3% Beauty Salons
3% Gas Service Stations
3% Auto Repair
3% Internet Based
2% Construction – Special Trades