Small Business Transactions Beat Pre-Pandemic Levels in Q4
U.S. business-for-sale transactions bounced back 14% in 2021 against ongoing COVID-19 fallout, hiring challenges, and supply chain disruptions. After modest gains to start the year, transactions accelerated 28% in the fourth quarter, eclipsing the pre-pandemic levels of Q4 2019. This end of year rally brought annual small business transactions within 11% of 2019, bringing optimism for a strong 2022.
A total of 8,647 closed transactions were reported in 2021, compared to 7,612 in 2020, with 2,364 occurring in the fourth quarter. In addition, sale prices grew 16% year-over-year, as buyers competed for a limited supply of strong performing businesses. This according to BizBuySell’s Insight Report, which tracks and analyzes business-for-sale transactions and sentiment of business owners, buyers, and brokers.
Businesses that sold in 2021 continued to be those with strong financials. As the pandemic lingered, buyers gravitated to businesses with reliable sales. Savvy entrepreneurs also sought out discounted businesses that offered prime real estate and other valuable assets despite poor performance.
The business for sale market demonstrated slow, yet steady growth over the course of 2021, particularly in terms of buyer demand for financially healthy businesses. Furthermore, despite 51% of surveyed owners being negatively impacted due to COVID-19 in 2021, key financials of sold businesses in the first quarter were the highest since BizBuySell began collecting data in 2007.
According to BizBuySell’s Small Business Survey, 60% of buyers indicated profitability and strong financials as a purchase requirement, followed by trained and skilled employees (37%), great location owned (38%), and great location leased (36%). Eighteen percent (18%) desired a business discounted due to poor financials. Regarding the type of businesses buyers were seeking, the service sector was the top preference (37%), followed by restaurants (26%), and wholesale distributors (25%). The most popular included pandemic-resistant businesses such as liquor stores, gas stations, auto repair shops, and ecommerce businesses.
Buyers Face Limited Inventory as Owners Delay Exit to Focus on Recovery
While 2021 was a record-breaking year for small business sale prices, it was also a year for many owners to remain on the sidelines until financial performance improved. According to BizBuySell’s small business owner survey, roughly half (52%) of small business owners say they were negatively impacted by the pandemic in 2021, while the other half were either positively impacted (25%) or not impacted at all (24%).
Even with President Biden’s American Rescue Plan Act, which expanded the PPP program and introduced other federal aid programs, recovery has been uneven. While many businesses have wooed customers back through outdoor seating, delivery, or virtual options, they still face challenges. Whether through staffing shortages, supply chain delays, or COVID-19 surges, the pandemic continues to impact many businesses.
While restaurants, retailers, and delivery services have been among the most visibly impacted by the labor shortage, the fallout is more widespread. Whether it’s a shortage of drivers unable to move freight, or no one available to answer phones, most business are facing these challenges.
Sixty-four percent (64%) of applicable owners surveyed say they have been impacted by labor shortages, of these, 59% say the situation is not improving or getting worse. Business brokers echo this sentiment, with an overwhelming 59% saying the labor shortage is the biggest threat to small business today with Covid restrictions a distant second (15%).
Furthermore, supply chain disruptions are leaving business owners to face inventory and material shortages, sales losses, and shipping delays. Seventy-five percent (75%) of applicable owners surveyed said their business has been impacted by supply chain issues, with half of those saying the issue is either not improving or getting worse.
Small businesses have been further strained by inflation raising overhead costs, forcing many to either raise prices and pass additional costs onto their customers or cut back on operating expenses. Roughly 72% of applicable owners say their business has been impacted due to inflation, with 76% saying it has not improved or is getting worse. This can make it increasingly challenging to attract customers and remain competitive.
Pent Up Supply of Businesses for Sale Expected, Fueled by Baby Boomer Retirees
Over 78% of business brokers say they expect more sellers to enter the market in 2022, with 25% saying they expect significantly more sellers. Furthermore, brokers expect an increasing number of Baby Boomers to enter the market. Just over the past year, brokers attribute 45% of their sellers to Baby Boomers who are too burnt out to continue.
Demand for existing businesses is expected to continue into 2022 as more entrepreneurs seek to acquire profitable businesses from retiring Baby Boomers. While some will be corporate refugees and first-time buyers, many are also existing owners looking to expand, as well as retirees looking for a second career. The majority business brokers (73%) expect an increase in the number of buyers hitting the business for sale market in 2022.
Read MorePivoting: A post-COVID-19 small-business strategy
In business, just because you want something to happen, it doesn’t necessarily occur. Hope is not a strategy. There are so many environmental factors that affect our strategies. These environmental factors were fully in play during the COVID-19 pandemic. So, what is pivoting? Pivoting is shifting a business to a new strategy. It is a change in the business model, small or large, an act of moving a company from where it is now to where it wants or needs to be. Most times, pivoting references an event (e.g., the COVID-19 pandemic) that causes major disruption to your daily operations. Transformational changes have come from this pandemic.
Now that there is light at the end of the tunnel, we can more fully assess the impact of changes that were forced by the pandemic. We experienced nearly complete cessation of business life as we knew it. Loss of revenue, market shifts and demand modulation made the original concepts that formed the foundation of our enterprise no longer options to success. We had to consider: Altering the process to deliver our product or service, changing how revenue is generated, developing a new product or product line and targeting different market segments.
Pivoting means rethinking your value proposition — what are you offering? What needs, wants or desires are you fulfilling? View your target market through a new lens. Whose need, want or desire are you fulfilling? How are you going to reach them? What key activities will your enterprise be engaged in going forward. Will your resource needs change? Do your strategic partners need to be modified to meet new customer needs, wants and desires.
To do this, you need to reach out to your current customers and test how their needs will be met in the “next normal.” Will they be eating out as often as they did pre-COVID19? Will they be willing to shop in a casual manner or will their shopping be very need-specific? Will they buy lawn mowers again rather than have a landscaper visit their property? Will they return to networking groups that have a Thursday morning breakfast every week? Will they attend concerts, seminars and workshops with many other people? We have seen pivoting taking place. Gyms are offering access to exercise apps through their membership. Small craft fairs are going virtual. Furniture manufacturers are reverting to smaller wood products — baby gates, shelving, small coffee tables. The answers to all of these questions will give the owners of small businesses the rationale for pivoting.
What alternatives can a small business owner consider? Two elements need to be considered: Which of these pivots can increase the revenues generated by your business and which option carries the most reasonable risk. You do this by running a variety of cash-flow analyses based on assumptions for each pivot change. Focus on your offerings – your pivot might be based on “less is more.” Instead of adding more products or service offerings, reduce what you are offering. Narrowing your offerings to the most profitable and obtaining higher conversion rate by targeting your customers more effectively.
Modify the expense model of your business. How can you re-create the expense side you’re your business, namely, can you manage your business with less travel or less people? Did using distance communications allow personnel still working do more with less? Can you reduce the expense side of your model? This means reevaluating your resources. What does it really take to operate the business? Maybe the pivoting answer is in restructuring your business.
Evaluate customer need and find one that you are not currently meeting. Your customer base may be the same, but their needs have changed over the past two years of the pandemic. What else can you offer them to meet their needs differently? It might mean adding products or services, or making your business a one-stop, when before the pandemic, customers were willing to make multiple stops. Consider creating a sub-brand. Can you subdivide your business to offer a sub-brand targeting on a different market segment? The pivot doesn’t have to monumental. It can be a small change that allows you to operate more profitably in a changed business climate.
Evaluate your current resources. What are the skills and expertise of your staff? You may have to reduce your staff and hire those with different skills or even add staff to fulfill a pivoting strategy of new products, services or sub-branding. You also might be able to reach out to your suppliers, strategic partners and even customers to leverage their resources to support your pivot. Once you have figured out the NEW direction, then align the rest of your business plan to support that change in direction. Research is the key. Talk to your customers, hold panels of customers using Zoom to address how you will be serving their needs in the future. You need to update your business model plan since every single element in your business will be affected by your pivot. Create a new business name or brand; get new businesses licenses or EIN; acquire new space in which to operate; lay off or hire staff; train your staff to deliver your product or service differently; sell off your old products, supplies or inventory; sell your old equipment or reuse it in your new model; develop new partnerships with suppliers and manufacturers; and engage outside services such as accounting, marketing or website management.
The last suggestion in pivoting is to communicate what you are doing. Being transparent with your customers and marketing, in general, will enable you retain current customer loyalty and attract new buyers.
Read MoreWhy Market Multiples Differ For “Seemingly” Similar Companies?
Ever wondered why two seemingly similar companies sell at different multiples of SDE or EBITDA? What factors are buyers considering which results in sale price differences? Here are some company characteristics that push a market multiple higher or lower:
- Documented Revenue/Earnings Trends
Buyers are willing to pay more for companies which are able to show verifiably consistent upward revenue/earnings trends than companies with questionable financials and downward trends. Characteristics leading to a higher multiple might include:
- well-documented financial statements and tax returns are essential;
- cash, COGS and business expenses are appropriately documented;
- non-essential, non-recurring expenses are minimized;
- detailed report of business assets (tangible and intangible) and liabilities is available; and
- the business has “prequalified” lendability.
- Growth Potential
Buyers are willing to pay more for companies with high growth potential than companies perceived as having low growth potential. The reasons are high-growth-potential companies generally have the following characteristics:
• create exceptional customer value;
• exploit high-growth market segments;
• are innovative;
• have a strong brand identity;
• create product/service differentiation; and
• invest in the development and delivery of new or enhanced services.
- Low Cost and Ease of Scalability
Buyers are willing to pay more for companies that can scale up easily/quickly and at relatively low cost. Conversely, capital-intensive companies are often high-cost/difficult-to-scale businesses that require significant reinvestment to increase capacity. Ways to enhance a company’s scalability may include:
• use technology to create employee efficiencies;
• focus on reducing/eliminating redundant tasks;
• offer value-added services or develop competitive advantages that increase profits;
• standardize service offerings to reduce capacity constraints; and
• identify ways to access quality candidates for potential new hires.
- Diversified Customer Mix
Buyers value a diverse customer mix with little concentration. If a company relies heavily on a single or few customers, the company risks:
• major impact from the loss of a contract;
• lacking leverage during contract negotiations and being forced to accept a less favorable contract;
• payment delays that may significantly affect cash flow; and
• customer audits that lead to disputed claims. - Low Company-Specific Risk
Buyers are willing to pay more for low-risk companies than high-risk companies. In addition to the factors above, Low-risk companies tend to be those with:
- Longevity (5+ years in business);
- Substantial hard asset value;
- Owner retirement;
- Absentee ownership;
- Stable management team in place;
- Long-term quality employees and customers;
- Apparent competitive advantages;
- Proprietary or exclusive products;
- Up to date assets and premises in superior condition;
- Highly favorable lease terms or ownership of real property;
- Desirable location;
- A high demand enterprise (manufacturing, distribution, or business to business service);
- Favorable seller financing; and
- Easy to understand motivation for selling.
The Bigger Picture
It is quite common for buyers and company owners to perceive the market value of a specific company in terms of market multiples based on prior sales of similar companies. But, when comparing the company to “similar” companies that have sold, they may not consider information about matters such as documented revenue/earnings trends, growth potential, scalability, customer mix and company-specific risk of those prior sales. Understanding these factors is critical to arriving at the most probable purchase/selling price for a company.
Read More
Leases: Key Considerations That Can Make or Break a Business
Are you selling a business that involves a lease? If so, this will be a factor that has significance to a buyer when you go to complete your deal. If your business relies heavily on its location and you don’t own property, then you’ll find the lease will be quite an important consideration for your buyer. By the same token, if you’re buying a business that involves a lease, you’ll want to carefully examine this document and consider how it might impact you and your business. Let’s take a look at some important clauses and terms you’ll want to be looking for.
Lease Transfers
What are the terms for transfer of the lease? This is something you’ll want to know before signing on the dotted line if you think you’ll be selling at some point in the near future.
Lease Lengths
How long is your lease? If your buyer can confirm that there are many more years on your lease, he or she will find that to be an advantage.
In the case of a business owner with a new endeavor, a shorter lease may actually be an advantage. That way the owner can get out of the lease if the business is not successful.
Competitors
If you’re planning on a lease in a shopping center, it’s essential to get in writing that the center will not accept other tenants that do what your business does. Otherwise, you’ll be constantly faced with competing with a similar business.
Unexpected Costs
It’s also important to look for clauses that address what happens in the case of an adverse event. For example, if the property was destroyed by a fire, who will pay in the interim?
There are other practical considerations to consider in leases that many business owners tend to overlook. For example, how are real estate taxes covered? Will you be charged a fee to cover maintenance of the property and, if so, what is it? Is someone in particular responsible for necessary repairs and who will pay for those?
It goes without saying that you’ll also want to check out clauses impacting rent changes. Otherwise, you may face unexpected rent increases that negatively impact your business.
Personal Guarantees
If you are a new business owner, a landlord may ask you to personally guarantee the rent. This would be quite a different lease from one that accepts a well-established corporation as a tenant.
As you can see, there is much more involved in a lease than just the amount of the rent. Be sure to read your lease carefully and ask questions. A Business Broker or M&A Advisor can assist you with lease terms when you are buying a business.
Copyright: Business Brokerage Press, Inc.
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What Should You Expect from Term Sheets?
If you’re selling your business, at some point you’ll likely be presented with a term sheet. As the name suggests, this document will include the “terms” of the deal including the basic economic terms and conditions of a prospective acquisition. It is a list of conditions to be met if the sale successfully takes place, yet it is not legally binding.
What is the Difference Between a Term Sheet and the LOI?
Both a term sheet and letter of intent (LOI) will include stipulations and lists for a buyer and seller to agree upon. The major difference is that the term sheet doesn’t require a signature, while the letter of intent does. In many cases, buyers are hesitant to sign before the due diligence stage. In this situation, you may find that the term sheet will precede the LOI.
How Lengthy are Term Sheets?
There is no standard model or form to a term sheet. Therefore, it may be as short as one page, or it could even be five or more pages. But no matter how many pages it may be, it should explain what is being purchased and a stated price. In some cases, the information in a basic term sheet will lead to a formal letter of intent.
What Components Should be Included?
In addition to the price and terms, a term sheet can include other considerations relating to the purchase of the business. For example, it can include employment agreements or non-compete clauses. They can also include conditions to be met upon closing. Often the term sheet will detail plans for the buyer to conduct due diligence and gain additional information. You can expect to find everything from warranties and lists of what is included in the sale to exclusivity clauses within term sheets.
One aspect of the term sheet that should not be overlooked is the method of payment. Typically, the payment sections are far more complex than just “cash at close.” Instead, they will describe a combination of elements including cash at closing, but also other forms of payments. In some situations, they will include details regarding a loan from the seller.
The term sheet is quite beneficial as it can expedite the sales process and prevent serious misunderstandings. As a result, this non-legally binding document can initiate a smooth beginning to a successful deal.
Copyright: Business Brokerage Press, Inc.
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