In addition to the BizBuySell Insights report highlighted in our prior blog, the International Business Brokers Association (IBBA) released the Q2 2020 Market Pulse report. Not surprisingly, it had similar conclusions as the economy is still uncertain, and it appears that things may not return to “normal” until at least 2Q 2021. This report takes a particularly close look at how COVID-19 has affected the market and how that may shape the future.
Slowdown in Transactions. The report states, “In surveying Main Street business brokers (representing businesses valued under $2 million), we found that 36% of their deals had been delayed, 16% had been cancelled, and 40% remained unaffected. (Of note: business brokers previously reported 11% of their deals cancelled in Q1 2020.). Delays were attributed to the buyer (44%), the seller (26%), and to bank financing issues (24%).” We have seen in our own market that banks are taking at least twice as long to approve SBA loans than before COVID-19 hit. Part of that may be due to the focus on emergency lending to existing businesses under the CARES Act, as well as a heightened awareness of current business risk. In addition, many people are trying to get SBA funding prior to September 27, 2020 due to the SBA making the first six months’ payments for any new loan.
The economic rebound may not occur prior to 2021. Most of the business brokers interviewed anticipate that the economy won’t return to pre-March 2020 levels until sometime next year. In addition, advisors reported that nearly half (48%) of their clients were back to operating at normal capacity in Q2, which is better than anticipated.
For the businesses who are operating normally, sales multiples are still strong, and there are more buyers than before the pandemic, looking for the right business to buy. Because of pandemic stress, and the existing aging population, there are also a high number of sellers ready to retire now.
Finally, how transactions are being structured has shifted. Many advisors are seeing more seller financing and earnouts to spread the risk more evenly between the buyer and the seller, particularly in the Main Street small business market. In addition, traditional bank lending has been slower than before. “What we’ve been hearing is that some lenders have chosen to focus on their existing portfolio,” said Steve Mariani, owner of Diamond Financial Services. “Those that stayed in the market are taking a slightly more conservative approach, reducing the multiples they will lend against.” This is not likely to change anytime soon as we continue to experience ongoing economic uncertainties, like COVID, additional government shutdowns, and the upcoming presidential election.
So, what is the key takeaway? Although some businesses will fail due to the pandemic and the economic downturn, it is still a strong market for small business transactions. Buyers can find may businesses on the market, and sellers can get good multiples for high quality, operating businesses. So, if buyers and sellers are willing to be creative in how they structure the transaction, there are great opportunities out there for those who wish to become entrepreneurs at this time.