Improving Business-For-Sale Conditions

The nation’s business brokers closed more business-for-sale transactions in 2010 than in 2009, according to BizBuySell.com

The number of closed business-for-sale transactions in the U.S., as reported by business brokers, grew 3% in 2010, according to the recent BizBuySell.com Insight Report.

“Spurred on by a strong showing in the fourth quarter, the business-for-sale market showed some promising signs of recovery heading into the New Year,” said Mike Handelsman, group general manager for BizBuySell.com and BizQuest.com. “In 2010, we saw more deals getting done. One of the key drivers for that growth was that business sellers were more realistic about their business valuations.”

The increased business-for-sale market activity came at the expense of a decline in business valuations. The median closed-transaction sale price for 2010 dropped 6.3% year-over-year, from $160,000 in 2009 to $150,000 in 2010. Key metrics used to value companies also fell slightly in 2010, with the average revenue multiple falling 2.1% and the average cash flow multiple falling 0.6%.

Declining business valuations suggest continued softness in the economy and constrained capital access reducing the number of qualified buyers. “While access to financing for business acquisitions began to loosen up in the second half of 2010, it remains difficult for many business buyers to get the financing necessary to purchase a company,” Handelsman said.

Smaller Deals, Tax-Related Activity Drive Recovery

With financing sources still in short supply, the growth in acquisition activity in 2010 was powered largely by a growing number of smaller business-for-sale transactions in non-manufacturing industry sectors.

It appears likely that uncertainty regarding tax code changes may have also contributed to increased sales activity in the fourth quarter.  Seller concern regarding the potential expiration of lower tax rates and the corresponding decrease in the business owner’s after-tax proceeds from the sale of a business could have spurred sales. Transactions completed in the fourth quarter were up 11% when compared to the fourth quarter of 2009.

Predictions for 2011

BizBuySell.com projects that 2011 will witness an accelerating recovery in the business-for-sale marketplace, citing the following industry drivers:

  • Latent Supply. While many business owners have hesitated to sell their businesses in the midst of a recession and flat/declining business performance, the recovering economy should reverse this trend and drive an increase in the number of businesses listed for sale. A compounding factor is that the earliest members of the U.S. baby boomer population, many of whom are business owners, have reached retirement age.  As an increasing number of small business owners near retirement, this trend will continue to bring an above average number of small businesses to the sale market.
  • Latent Demand. Business brokers nationwide report a growing number of buyers looking to purchase a company. This is driven in part by declining business valuations, which makes buying a business more affordable, and in part by the nation’s high unemployment numbers, which have convinced many laid-off employees to give entrepreneurship a try. According to Handelsman, the principal obstacle to making the transition from unemployment to business ownership remains a lack of available financing for business acquisitions.
  • Easing Credit. The Federal Government and the SBA have recently focused on helping banks ease their lending restrictions to provide necessary capital to the small business market. As capital becomes more readily available, it will be easier for brokers and business owners to close sales.

“It’s very simple,” said Handelsman. “When credit is more readily available, the wheels of business succession will start to turn again. Until then, we can expect a moderate recovery in the business-for-sale marketplace.”

BizBuySell.com is an Internet marketplace for buying or selling a small business. The company releases its BizBuySell.com Insight Report on a quarterly basis, reporting changes in closed transaction rates, valuation multiples and other economic indicators for the small business transaction market. Closed transactions are reported to BizBuySell.com by business brokers nationwide.

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