Small Business Sales Activity an Economic Indicator

IMGCAP(1)]Although the median sale price of small businesses has increased over the last six quarters, businesses are taking longer to sell, according to BizBuySell’s Q2 Insight Report.

The median time to sell a small business rose from a low of 154 days in Q4 2014 to 188 days in the last quarter (Q2 2016). This puts the average time to market a small business at approximately six months.

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 record-setting 2014.

Some highlights from the report:

• The median revenue of sold small businesses in Q2 2016 was $441,331, a 2 percent drop from the same period last year.

• The median cash flow grew 2 percent, from $102,995 to $105,000 in Q2 2016.

• The median sale price is $199,000, nearly identical to the $200,000 2015 mid-year level. This price aligns with what buyers are looking to spend, according to BizBuySell’s 2016 Demographic Report, which found more than half of buyers will target the $100,000-$499,000 range.

“The economy has been improving enough that buyers are confident in their ability to take the plunge,” said Bob House, president of BizBuySell. “Also, the stock market is at an all-time high, so people have more capital available if they’re invested in the market.”

The AICPA PFSi (Personal Financial Satisfaction Index), released on Thursday, mirrors this observation. The second quarter 2016 PFSi found that Americans’ financial satisfaction climbed to its highest level since the third quarter of 2007. The PFSi weighs a variety of economic factors to determine the financial standing of a typical American. It is the result of calculating the difference between the Personal Financial Pleasure Index and the Personal Financial Pain Index, using both proprietary and normalized official U.S. Government data.

The outlook from the National Federation of Independent Business is slightly less rosy, with its Small Business Optimism Index still below its average for the past 42 years.

But with close to 95 million Americans not in the job market, for many people small business ownership is a way of seeking employment. “It’s one way of looking for a job,” House remarked. “By purchasing a small business, you can buy a job. There’s a high interest in owning a business and building value that they can someday sell. They can’t sell a job if they work for a corporation.”

Small business buyers are more diverse than in years past, according to House. “Many come from other countries where business ownership is more of a desired route toward employment,” he said.

“On the sellers’ side, a lot of baby boomers are selling because they wish to retire,” House noted. “However, we expected the wave of sellers to hit sooner than it has. There are a lot of boomers working later, and not retiring when they reach 65.”

“Overall, the financials on the businesses that sold were in line with what we saw last year,” he said. “The median revenue and cash flow were both up 2 percent year over year. So were the sale prices, with a median sale price of $199,000.”

Sales volume might be something of a lagging indicator, given not only the number of days a business is listed, but also the time it takes in preparation prior to listing a business. This includes preparing two to three years of financials, optimizing operational efficiencies and improving the appearance of the business, according to House. “This process helps sellers achieve the highest possible return,” he said.

Businesses sold in Q2 reported a median of 178 days on the market, a slight improvement from 188 days in the previous quarter, House noted. “Coming out of the recession, the median days on the market peaked at 200 in 2012,” he said. “That number declined until late 2014 when it bottomed out at 155 days. Since then it’s been on a more or less upward trend until now. For whatever reason, businesses for sale are sitting longer in the market. This corresponds with a higher asking price. While sale prices have increased over the last six quarters, the sales cycle has lengthened. It’s not clear whether this is correlation, causation or coincidence, but it is interesting and worth noting for sellers.”

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