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
Is Your Deal Really Done?
Once you get to the stage of your deal where you have a signed letter of intent, you may already be feeling a sense of relief that your deal is near finalization. But remember that the due diligence stage is typically yet to come. This stage includes everything from financial and legal investigations to a review of specific information regarding how a business is run.
The due diligence process can be quite comprehensive and it often reveals some surprises. Because it is important for sellers to know what to prepare and for buyers to know what to look for, let’s examine some of the categories that are reviewed during this process.
Trademarks and Copyrights
Will assets like trademarks, patents and copyrights be transferred? This is a point that has certainly interfered with some deals being successful. Due to the fact that trademarks, patents, and copyrights are often essential parts of a business, they cannot be overlooked.
Products and Industry
Due diligence will likely include analysis of product lines and the respective percentage of sales that they make up. If the business in question is a manufacturing business, then all aspects of the process will be examined. For example, buyers will be looking for age and value of the equipment, information about suppliers, etc.
Financial Statements
It goes without saying that financial statements should be poured over during due diligence. Current statements and incoming sales should be carefully reviewed. Review of financial information will also include balance sheets. Is there bad debt? Is there work in progress? These kinds of issues will be evaluated.
Customer Lists
If you are selling a business, you should be prepared to share lists of major customers. Buyers may also want to compare your market share to that of your competitors.
Key Employees
Buyers should be looking for information on key personnel, as well as data on any potential employee turnover. If you are selling a business, it’s important to try to fix any staffing problems that might interfere with a buyer’s ability to properly run the business.
A key goal of the due diligence process is to find potential problems, such as liabilities and contractual issues. But on the upside, due diligence also includes investigation into assets and benefits. The end result should be that the selling price of the business is justified and both parties walk away satisfied. As stated above, it is very common for problems and issues to pop up during due diligence, so it’s important to stay proactive and be open to negotiation until the deal is finalized.
Copyright: Business Brokerage Press, Inc.
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Questions to Ask When Negotiating a Deal
Almost every sale of a business involves a high degree of negotiation between buyers and sellers. In this article, we share some of the questions you can ask yourself to prepare for this part of the process. After all, optimal outcomes are typically only achieved through proper negotiation strategies. Keep in mind that one of the key strengths possessed by Business Brokers and M&A Advisors is expertise and skills in negotiating deals.
Can Both Parties Split the Difference?
If the buyer and seller can’t agree on a number, one negotiating tactic is to have them split the difference. This is a tactic that is simple to understand, and it shows both parties that the other is willing to be flexible. This reveals a good degree of goodwill and can serve to not only keep both parties talking, but also lower any pre-existing tensions. When both parties are still at the table, there is still hope that a deal can be reached. This tactic serves to continue the discussions and can often be highly beneficial.
Can the Buyer and Seller Better Understand One Another?
When it comes to good negotiations, one of the goals is for both parties to seek to understand one another. Sometimes a buyer or seller’s needs don’t even involve the numbers on paper. Instead, they may be seeking to adjust terms to make them more conducive to their overall goals. If you can keep an open mind and seek to better understand what the other party is ultimately looking for, it can go a long way in making the deal happen.
Can You Bring in a Professional?
There is an old saying that says “Never negotiate your own deal.” One of the benefits of bringing in a brokerage professional is that this third party won’t have the same level of emotional investment. This means that he or she can keep a neutral perspective and be more apt to see things from both sides. Sometimes a new perspective can work wonders. Further, a brokerage professional will understand the myriad of complex factors that must be successfully resolved before the deal is finalized. A Business Broker or M&A Advisor will have tips and techniques that can only be gained from years of first hand exposure to making deals happen.
Copyright: Business Brokerage Press, Inc.
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