Second Quarter Sees 8% Increase in Business Transactions Amidst Changing Market Conditions
Transworld Business Advisors, a leading source of insights in the business transaction realm, reports a notable 8% rise in business acquisitions during the second quarter of 2023. This surge follows a preceding 4.8% gain during Q1, showcasing a consistent trend of growth as market participants adapt to the shifting landscape of higher interest rates. These findings come from BizBuySell’s Insight Report, which analyzes and tracks business-for-sale transactions in the U.S., drawing from surveys of business owners, buyers, and brokers.
An Insight into Closed Small Business Transactions
Data from BizBuySell.com illustrates the trajectory of transactions from 2017 to 2023, emphasizing the upward momentum in recent quarters. However, deal velocity (the speed at which businesses sell) has increased meaning that overall inventory of businesses on the market is at an all time low.
Decreasing Median Sale Prices Amidst Creative Financing Strategies
While business transactions showcased a steady ascent in the past two quarters, there is a discernible downward trend in sale prices. The median sale price in Q2 saw a 14% drop to $300,000 from the preceding quarter. Moreover, the median asking price in Q2 experienced an 8% decrease over the same period.
This drop in sale prices can be attributed to the influence of higher interest rates, resulting in added pressure on business valuations due to elevated financing costs. Consequently, the average revenue multiple decreased by 3.3% from the previous quarter, while the average cashflow multiple dropped by 1.3%.
Median Sale Price vs. Asking Price
Analyzing median asking and sale prices of small businesses from 2017 to 2023 reveals interesting trends. This decline in sale prices, however, serves as an indication of business owners and brokers employing innovative deal structures to cater to the purchasing power of buyers impacted by these evolving financial conditions.
According to Katrina Loftin, Co-Founder of M&A Business Advisors based in California and Nevada, “Deals are becoming more creative. For instance, if real estate is involved or the seller possesses leased property, adjustments can be made to the business price while compensating with real estate assets. This establishes a mutually beneficial situation for both the buyer and the seller.”
She further illustrates the concept, stating, “Consider a scenario where the buyer is willing to pay $120K less than the asking price. In this situation, you can raise the rent by $1,000/month above market rates for a 10-year period, resulting in a minimum $120K increase, often exceeding this figure due to rent escalations. It’s important to note that this strategy might marginally lower the business valuation. Additionally, upon lease expiry, rent should revert to market rates if lease extensions are pursued.”
While 20% of surveyed business owners own the commercial real estate used for their operations, this strategy might not be applicable for 80% of deals where rent adjustments aren’t feasible. Nevertheless, other creative approaches remain viable to facilitate closures.
Impacts of Higher Rates on Buyers, Sellers, and Lenders
With the prevalent increase in interest rates, the business transaction arena is witnessing transformations in buyer behavior and lending patterns. Notably, 56% of surveyed owners are equipped with exit strategies, and 50% of these individuals are actively selling or anticipate doing so by 2024. These sellers with attractive businesses are poised to draw interest, as buyers persist in their pursuit of promising prospects despite the higher interest rates.
Interestingly, 48% of surveyed buyers revealed that rate hikes have not influenced their timelines for acquisitions. Simultaneously, BizBuySell reported a 23% surge in monthly traffic during Q2 compared to the prior year, indicating sustained buyer interest.
In terms of financing mechanisms, 43% of surveyed buyers plan to leverage SBA or traditional bank loans for acquisitions, while a substantial 70% intend to negotiate seller financing as part of the deal structure. In contrast, only 22% of sellers plan to offer seller financing, and 28% are yet to decide. The absence of seller financing options can considerably reduce the pool of potential buyers and even act as a deal-breaker for lenders.
Katrina Loftin emphasizes, “Almost every transaction nowadays involves some degree of owner financing. Many lenders mandate at least a 10% note from the seller. Moreover, buyers seek to alleviate concerns about an uncertain future by requesting seller financing.”
Shep Campbell from M&A Specialists in Arkansas echoes the significance of seller financing, particularly in mitigating risk for lenders. “Seller financing is crucial for a seller to consider. In many cases, buyers value this option as much as lenders. In the aftermath of COVID-19 and rising interest rates, lenders are increasingly cautious and are often requiring a portion of seller financing as a safety measure.”
While seller financing involves certain risks, it offers compelling benefits in a high-rate environment, extending beyond bridging financial gaps. “We use seller financing to secure a higher asking price for our
For more on the sale of businesses in Tampa Bay Contact Michael Shea of Transworld Business Advisors of Tampa Bay at 321-287-0349.