BizBuySell.com, the Internet business-for-sale marketplace, recently announced the results of its August 2013 survey of business buyers and sellers. BizBuySell.com’s nationwide survey, designed to better understand the current wants, needs and sentiments of buyers and sellers in today’s small business market, surveyed more than 1,500 people currently interested in either buying or selling a business. Suggesting a strong business-for-sale market overall, the study found that both prospective business sellers and buyers are optimistic about their prospects of finding a match at an acceptable price.
According to the survey, 80% of prospective buyers felt confident they would earn an acceptable price and 65% of sellers felt they could get a price that met expectations. Buyers expressed this optimism despite the fact that 61% also felt businesses currently for sale are generally overvalued. Sellers didn’t agree, with only 29% saying businesses are overvalued.
What buyers and sellers do seem to agree on is that transactions can be completed in the current economic climate. That’s a big shift from the dearth of small business transitions that took place during recent down-economy years, in which sellers were reluctant to sell struggling companies and there was a shortage of qualified buyers who could get acquisition funding to complete a purchase.
“Qualified business buyers — including individuals, companies and private equity firms — are now very active in the market relative to previous years,” Curtis Kroeker, Group General Manager of BizBuySell.com, said. “At the same time, because they see more buyers entering the market, the majority of sellers are also optimistic. It’s a virtuous cycle that bodes well for both buyers and sellers. With both sides ready to come to the table, we’re seeing market fundamentals aligning in a way that bodes well for continued strong small business ownership transition volumes in the United States in the months and, hopefully, quarters to come.”
Buyers Market Begins Shift Toward Sellers
The survey’s finding that buyers are slightly more optimistic about their business-for-sale transaction prospects than sellers is supported by recent results reported in BizBuySell’s Q2 2013 Insight Report, a quarterly analysis of business listings and closed-transaction data reported to BizBuySell by the nation’s business brokers. In this report, BizBuySell noted that cash flow multiples for sold businesses remained below pre-recession levels, suggesting that buyers can purchase good businesses at a favorable price.
Survey respondents agreed with this sentiment. “Tough economies are the best times to buy investments because they tend to go at significant discounts,” noted one prospective buyer who participated in the survey.
But as the economy and overall business health continues to improve, sellers are beginning to get more for their sales. While still low relative to pre-recession levels, cash flow multiples increased in the first two quarters of 2013, indicating that sellers are gaining more power at the negotiation tables and the market is starting to shift back toward a better balance.
Both Parties Looking To Move Quickly
As the economy continues to improve, buyers and sellers are growing more and more confident that the time to make a transaction is now. Many sellers have been patiently waiting out the recession in order to receive an acceptable sale price. This includes a large number of Baby Boomers looking to retire. At the same time, buyers are now getting better access to financing and hoping to take advantage of the buyers’ market. In fact, of the prospective buyers surveyed, 88% consider themselves in the market to purchase a small business within the next 1-2 years.
“People’s perception of the economy has changed in the past 12 months,” one seller noted, suggesting that the improving economy is getting buyers out in numbers.
In fact, both buyers and sellers were confident they could close a deal quickly in today’s market. More than 78% of buyers believed they could find and buy a business within a year of starting their search while 70% of sellers expected to be able to sell their companies within a year.
Buyer, Seller Gap In Financing
Financing looks to remain a sticking point for many business sales. One interesting survey result concerned the number of buyers who desire to use seller financing to help fund a deal. Seller financing typically involves the seller agreeing to take 20 percent or more of the sale price in the form of a loan that the buyer agrees to pay back over time, with interest. Of buyers surveyed, 49% expect to use seller financing when they purchase a business. Yet among the for-sale-by-owner listings on BizBuySell.com, just 25% offer seller financing on their listing. This leads to a hefty gap in market participants’ views on how these transactions will be paid for and points to the importance of both sides discussing the financing option early in the sales process.
“Even as lending begins to free up, seller financing remains a valuable tool for buyers to fund their business purchases.” Kroeker said. “Although one in four sellers offer seller financing initially, it’s likely many of them will end up offering seller financing as part of the negotiations in order to meet the buyers’ needs and complete their transactions.”
Sellers Willing to Help Post-Transaction
One key discussion point during a business sale is how involved the seller will be in the business post-sale. This can quickly become a point of contention if the seller would like to stay involved while the buyer would like to take the reins alone. Sellers are especially likely to want to stay if seller financing was involved in the deal so they can ensure the business is running well and the new owner can make all necessary payments.
According to the survey, however, both buyers and sellers appear to have realistic expectations regarding the transition process. Of buyer respondents, 75% said they would like the former owner to stay on for at least a day per week during the 6 months after a sale. Sellers seemed to be in agreement as 56% said they would be willing to stay on for at least a day per week to assist with the transition of the business to a new owner.
Restaurants Popular Among Buyers; New Franchises Lose Ground to Previously Owned Franchises
The survey results suggest that certain types of business are in higher demand than others. Among prospective buyers, nearly 25% of survey respondents say they are considering a restaurant as their business purchase. This was by far the most popular industry for buyers, with Internet businesses and convenience stores coming in as the next most popular target at 18% each.
In the franchise industry, survey respondents also voiced a preference for existing franchise locations over new franchise opportunities. 34% of buyers said they would consider an existing franchise location while only 25% said they would be interested in purchasing a new franchise.