Small business acquisitions grew 10% over the previous year and 3% over the previous quarter, according to BizBuySell's Insight Data, which tracks and analyzes U.S. business-for-sale transactions and sentiment from business owners, buyers, and brokers. A total of 2,384 businesses changed hands in the first quarter, representing an enterprise value of $1.8 billion, which is 24% higher than the same time last year.
After a relatively flat 2023, bogged down by rate hikes and the economy teetering between recession and a soft landing, deals appear to be moving forward again. In fact, U.S. banks anticipate an increase in demand for loans in 2024, according to a recent Federal Reserve survey.
However, transactions are still 5% below 2019 pre-pandemic levels. Dealmaking is becoming more prudent as buyers and sellers carefully consider price and terms to better align with the market. Today 27% of sellers are open to including some portion of seller financing, compared to 22% a year ago. This is good news for buyers, where 85% say they consider it important.
Businesses in Q1 sold at slightly lower prices, with the median sale price down 4% over the previous year. The lower prices correlate to sold businesses reporting weaker financials in the first quarter. Both median revenue and median cash flow of sold businesses dropped 3% over the previous year. Amid inflation and rising labor costs, small businesses are facing thinner margins.
Market Outlook
Heading into the year, the business-for-sale market has shown its ability to tolerate higher interest rates and continue its path toward a post-pandemic recovery. Despite the challenges of inflation and minimum wage hikes cutting into profits, the economy remains strong, unemployment is relatively low at 3.8% and a recession seems less likely.
Owners appear optimistic that the future will present a profitable exit ramp if desired. When asked to name their most difficult and profitable year, the majority (31%) of owners said 2020 was their most difficult, while 41% said they expect 2024 to be the most profitable.
Most owners (71%) surveyed believe that if Trump is elected president, this would have the best impact on small businesses, with many commenting he has a better understanding of businesses and how they are affected by policy decisions.
2024 Deals Expected to Pick Up Pace, More Sellers Plan to Offer Seller Financing
As buyers and sellers adjust to current conditions, transaction activity is expected to pick up pace. With interest rates not likely to come down until the latter half of the year, if at all, buyers and sellers have less incentive to wait on the sidelines. Moreover, economic output is expected to expand this year, mainly due to the resilience of the U.S. economy, according to a recent International Monetary Fund forecast.
Friar offers his perspective, “My prediction is that seller activity will pick up in Q2 and Q3, leading to a very robust Q4 2024 and Q1 2025 in terms of closings. I also feel that, barring any major economic disasters, 2025 will be a very strong year for sellers engaging to sell. This is because: a) seller sentiment will continue to tick up; b) rates may finally start to tick down; and c) there will be clarity on the 2024 election results and therefore policy decisions affecting the economy for the next four years.”
Changes in deal structure are one such way transactions have moved forward. More sellers are coming to realize that some level of seller financing, typically 10-20%, should be expected to secure the deal.
Sellers More Likely to Attract Buyers with Well-Managed Businesses and Strong Financials
In today’s market, sellers can increase their chances of a successful sale by developing a strategy of looking at it from a buyer’s perspective. Lisa Riley, CEO and M&A Advisor at Delta Business Advisors, says sellers should adopt three key practices:
“First, maintain transparent financials—eliminate any discretionary spending to clearly demonstrate the business's profitability. Second, take vacations—start with a weekend or two, then extend to a few weeks, or even a month, to show that the business can thrive without your constant presence. Third, invest in the right management team to increase the attractiveness and resilience of your business,” says Riley.
Looking to buy or sell a business in today's market?
Whether you're considering a strategic acquisition or planning your exit strategy, Transworld Business Advisors of New Mexico is here to help you navigate the complexities of the business-for-sale landscape.
With small business acquisitions on the rise and market conditions evolving, now is the time to explore your options. Contact us today to discuss your goals and discover how our experienced team can guide you through every step of the process. Whether you're a buyer or seller, let's work together to achieve your business objectives. Reach out to Transworld Business Advisors of New Mexico and seize the opportunities waiting for you in the dynamic world of business transactions.
Source: BizBuySell
