The 2Q2020 Insight Report from BizBuySell, which is the result of extensive surveys of business brokers on small business purchase and sales activity provides the best information on what is going on in the market.
First, we need to be honest – the second quarter of 2020 was tough for small business transactions, as the number of closed sales plummeted by 37%, the greatest decline since 2009. Because of COVID-19 and the shutdown of many non-essential businesses in March/April, owners had to focus on maintaining operations, working to obtain financial assistance through EITC and PPP loans, and people were focused on just getting by day-by-day. However, after the 51% decrease in transactions in April, activity in May and June trended up so that by the end of June, activity was about 27% less than in 2019. Another interesting fact is that while buyer inquiries slowed significantly in March and April as buyers were trying to see where the dust would settle, buyer activity recovered and has since exceeded pre-pandemic levels. “Fast forward to July, and 71% of surveyed owners that were forced to close have resumed operations. Entrepreneurs are pivoting, adapting, and seeking opportunity amidst the disruption brought on by the pandemic, and as a result, acquisitions are steadily bouncing back from April lows.”
There are two key buyer opportunities in the current market, according to the report:
- FIRST are buyers looking for a profitable, COVID-resistant business: “Sixty-six percent of surveyed buyers indicated a preference to buy this type of business, with 44% searching for a business that is growing under current conditions. In many cases, these businesses are not just withstanding the pandemic, they are absolutely thriving.” A great example is a restaurant that pivoted from in-house dining to effective take-out and delivery alternatives.
- SECOND are buyers who are seeking discounted sales prices, which will likely come by way of a depressed business. “At the right value, 59% of buyers would consider buying a closed business due to the pandemic, and 81% would consider a business that has remained open but has been negatively impacted.”
However, more business transactions seem to fit into the first category. In fact, according to BizBuySell data, the median sales price of businesses sold in Q2 rose 6.1% compared to 2019, from $270,000 to $286,500. This point may serve as a rude awakening for the 58% of surveyed buyers looking for a profitable business while expecting a discounted price.
As for listings, the number of businesses listed for sale on BizBuySell dropped 8% in 2Q2020 versus the previous year as owners re-assessed their exit strategy. According to BizBuySell's survey, 16% of business owners plan to exit their business earlier because of the pandemic, while 20% plan to exit later, and 61% indicated they are not changing their timeline.
So, what is the outlook going forward? Much like the rest of the economy, the business-for-sale market will depend on whether the country can keep the virus under control to a level where businesses can freely operate, and customers are confident enough to return. The unknown of future economic impacts and the potential trajectory of the virus fosters an equal level of uncertainty for both buyers and business owners.
Regardless of motive, sellers will be met with huge demand once they enter the market. In the short term, the CARES Act is motivating buyers to act quickly so they can qualify for the SBA making the first 6 months of principal and interest payments for SBA 7a loans closed before September 27th, 2020. From the BizBuySell survey, 39% of buyers are hoping to take advantage of this benefit. Finally, as record unemployment rates leave millions of Americans without a steady paycheck, many are seeking more control of their futures through business ownership.