COVID-19 Stalls Q1 Transactions; Presents Once in a Lifetime Opportunity for Acquisitions

BizBuySell’s Insight Report shows Q1 small business M&As start strong, throttled by economic disruption; however, unique opportunity exists for buyers through relief programs and low rates

When calendars flipped to January 1st 2020, all indicators pointed to another active quarter in the business-for-sale market. Despite US-China tariffs occupying headlines, the health of the small business sector hit all-time highs in 2019. A combination of record financials, available affordable financing and retiring Baby Boomers created a robust mix of supply and demand, resulting in a third straight year of a historically strong market. In fact, the year ended with transactions up 2.3% in Q4 2019 versus Q4 2018.

That story continued for the first 63 days of the year, with small business transactions in line year-over-year according to BizBuySell's Q1 Insight Report, a nationally-recognized economic indicator which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide. The following Monday, March 9th, the stock market suffered its worst day since the Great Recession, causing panic about the financial climate and jolting the economy. The same week, President Trump declared a national emergency while the Center for Disease Control recommended limiting gathering of 50 people or more in the U.S.

Finally, on March 16th, California Governor Gavin Newsom announced the country's first statewide shelter-in-place order, forcing all but 16 critical infrastructure sectors to close their doors. By the end of March, 30 states had mandated social distancing orders. Over the final 26 days of March, the number of reported sold businesses dipped 43% year-over-year. Whether these deals were delayed or simply not yet reported as brokers scrambled to put their own business plans in place remains to be seen.

The tale of two quarters resulted in an overall 11% dip in Q1 transactions versus the year prior, down to 2,225 from 2,504. However, the financial performance of sold businesses increased year-over-year, with median cash flow up 10.9% and median revenue up 11.1% to $129,548 and $600,000 respectively. The higher financials had a direct correlation to sale prices, which also rose 11.1% to $250,000.

Since the initial shock, the federal government quickly approved several relief acts aimed at helping support small business. Perhaps the most significant for the business-for-sale market is the Small Business Administration Debt Relief Program. Under the program, the SBA will pay the first six principal and interest payments on behalf of the borrower for SBA 7a loans. This payment is made as a subsidy and not a deferment (meaning there is no obligation for repayment) and is eligible for all existing 7a loans and new 7a loans closing between March 27th and September 27th, 2020.

For business buyers, the SBA Debt Relief Program translates to six months of zero cost P&I. Factor in historically low interest rates and you have acquisition costs considerably lower than even 3 months ago. A buyer that gets approved for a SBA 7a acquisition loan that closes before September 27th can receive this limited time and significant benefit.

"This is the opportunity of a lifetime for a well-positioned buyer," said Tony Calvacca, managing partner of The NYBB Group. "And if you already operate a solid, sustainable business, there is never going to be a better opportunity to grow your volume exponentially. This is especially true for B2B companies or those in the service sector where demand is going to be constant." Calvacca specifically mentions HVAC companies as a robust opportunity, "When summer rolls around, you can bet people will pay to not bake in their living room."

Of course some sectors are going to have more challenges when it comes to selling in today's climate, with those locations facing government imposed shut downs having the most questions marks. For those owners, Calvacca says hyper-negotiating lease terms and other business costs can be a great way to add value.

"Landlords don't want to lose tenants, so they're willing to negotiate on mutually beneficial lease terms," says Calvacca. "If you can work out multi-year, low cost lease terms, buyers ready to withstand the storm will pay a premium to acquire you. For buyers it's all about managing risk, and in this scenario the risk is offset by the advantage they'll have once things rebound. Many popular brands are expanding this way, and at the same time, owners are able to sell their business even though it's technically closed."

Matt Coletta, Co-Founder and Managing Partner of California based M&A Business Advisors, says creativity and making sure all parties involved in a transaction are flexible will be the key going forward this year.

"Everyone has to cooperate, and you have to be creative now in order to make deals and minimize the buyer's risk in this environment. This applies to both smaller Main Street businesses and those businesses selling for excess of $1 million," says Coletta. "I closed a transaction last week that only happened because the seller, buyer, landlord and I collaborated and came up with fair terms to minimize the buyer's risk so that we could move forward and close."

Coletta also echoes Calvacca's sentiment on opportunity. "If buyers are willing to take the leap on buying a business in the near future, they will be in a great position to purchase at a discount and put a favorable long-term lease in place."

A leap on buying is a very accurate description for many businesses in wake of COVID-19. According to BizBuySell's April 2nd survey of business owners, 78% reported a decline in customer demand as a result of the coronavirus pandemic. Even businesses deemed essential or able to stay open may feel the effects. "My coffee shop is inside a hotel. The hotel lost much of their registered guests and events/conferences due to the lockdowns," said Scot A. Munns of Dark Shot Coffee in Nevada. "I am still open as take-out, but not near the level of business I have had."

While it's unreasonable to believe all of these businesses will survive the pandemic fallout, as Calvacca puts it, "If you can make it through the fire, you're going to really do well."

Managing Payroll Takes Priority

As demand has decreased, owners have turned to payroll cuts, with 44% of surveyed owners taking this action. However that statistic isn't as negative as it sounds. While many owners engaged multiple payroll reduction measures, the most common was temporary layoff with full intention of re-hiring those let go, with 55% of owners selecting this option. Calvacca advises businesses to be cautious of taking this route, as "these employees are going to collect unemployment, which may be close to their normal pay. As their routine adjusts, many will naturally question whether to return to work versus staying on the sideline and continuing to collect benefits."

The survey also revealed one out of two (51%) small business owners are either reducing their own salary or foregoing it completely to maintain operations.

"We had to cut employee hours. My partner and I have not paid ourselves," said Suzanne M., owner of a cleaning service in Pennsylvania. Like Suzanne, 41% percent of surveyed owners are furloughing employees with reduced hours or pay. Just 7% of owners have resorted to job termination with no intention of hiring back. This single-digit percentage is a hopeful sign that today's record unemployment rates are a temporary phenomenon.

Tom Wales, owner of Texas based Casa Del Bro Mexican Grill & Creamery had this advice to offer in regard to managing payroll during the pandemic. "Keep the faith and try to take care of your employees as much as possible," said Wales.

Danielle Perrette, owner of Selection Group LLC in New Jersey, added "As an owner, it's your job to take care of your staff. So do all you can to help support those in your company. You wouldn't have business without them." Brad Stevens, owner of CPR Cell Phone Repair in Washington, echoed the sentiment, "Take good care of your employees and let them guide you on what they need to stay physically and mentally healthy through this historic situation."

With the Small Business Association's enactment of the $349 billion Paycheck Protection Program (PPP), taking care of staff will hopefully be easier. Under the PPP, eligible businesses can borrow up to 250 percent of their average monthly payroll expenses over the past year. In addition to payroll expenses, the funds can also be used for rent, utilities and existing interest payments on mortgages for the period between February 15th and June 30th, 2020.

What makes PPP loans most attractive is that they are 100% guaranteed by the federal government, meaning no collateral is required. Furthermore, the loans will be forgiven under certain conditions around maintaining employees and wages. Even loans for businesses unable to maintain their full staff can receive a proportionate amount of forgiveness. Ultimately, this means businesses can be infused with as much as $10 million to maintain operations, with little to zero repayment necessary.

As the benefit is tremendous and the risk is low, it's no surprise that 70% of surveyed owners familiar with the PPP are expecting relief as a result of the loan program.

"The PPP loan is just what we need as small businesses to help us survive," said Allan Roosz, owner of Splish Splash Laundry in Tennessee. Raffael Tusa, of Body Balance Studio Inc in Virginia, echoes the positive sentiment, stating "If we get a PPP loan, we should be okay."

"Although we have always done some carry-out, we make our money from casual sit down dining. We can seat over a 100 customers. I was thankful to stay open until April 4^st as I was able to pay all my vendors and I am up to date on my utilities until next month," said Liz Larrison, owner of Larrison's Diner in Indiana. "I was then encouraged to file for the PPP, which I did because my employees are having so many small issues with unemployment. I listened to webinars and zoom meetings provided by the SBA and our local Chamber of Commerce to learn more about the PPP and the EIDL (Economic Injury Disaster Loan). I have filed for both, and my bank recently notified me that I will be receiving the PPP. I have heard nothing on the EIDL."

Still, there is some confusion on how to take advantage of the program. Mikal Duilio, head of P & R Athletics, an adult sports business in Oregon, questioned getting PPP and why employees would want to work when a potentially more beneficial option exists in collecting unemployment. "Why would I have employees with zero activity in my business? Why would one want to work when they can stay home and collect unemployment which could amount to 100% or more of their income with the addition of the new $600 federal benefit.”

And more questions remain. "As a sole proprietor, I'm afraid the loan won't be waived, and compensation to self is unclear. Also, use of a home office - am I limited to the usual percentage of home I claim for home office to use as rent?" asks Valerie Koenig, owner of Business Plans Hawaii.

The PPP, while not without its early growing pains, is built to help owners continue to operate without cutting back. Many are finding ways to do so even without it, or are at least adding while subtracting. Roughly half (49%) of surveyed owners are either adapting their business model to the COVID-19 landscape, increasing their investment in marketing or investing in their online presence.

"We have increased availability of our service hours to 24/7 to provide service to existing customers in a safer, less crowded, more convenient manner," said Steve Brown, owner of United Fire Consultants in Tennessee.

Veronica Hinkle, owner of Creative V Crafts in California had this to say about the importance of online marketing, "Prior to this pandemic, I already had a website, email list, and small social media platform. Since this is the only way to continue offering my services, whether paid or unpaid, I have been diligently adding to my online presence." Hinkle added, "It is also important to note that it keeps me feeling productive and gives a sense of accomplishment."

Allan Roosz described a nuanced use of advertising to convey safety and availability. "I increased Facebook advertising to let customers know we are still open and have put in place additional cleaning and rules to help folks be safe."

With Change Comes Opportunity

As Calvacca referenced in regard to the HVAC industry, not all businesses are suffering in wake of COVID-19. According to the survey, 11% of owners have experienced no customer impact as their businesses remain necessary.

"I'm a convenience store operator so I don't feel need has either risen or declined, people still need gas and they still need food and drinks," said Jonathan Tisdale, owner of Pop Shoppe #4 in Oklahoma. "Also I think sometimes people just want to get out for a minute and coming up to the store and grabbing something gives them a little release."

Furthermore, an equal 11% of owners are seeing an uptick in sales. Budding trends prior to the mandated social distancing are now a necessity. As a result companies operating in sectors such as delivery, online education, e-commerce and those which facilitate working from home are entering boom territory.

"People need to work from home, so we are assisting with the transitions," said Dan Gracia, owner of Joon, a Florida IT/VoIP phone company. Another side effect of the stay at home mandates, for those with the financial capacity, now is the perfect time to take on oft-delayed home or repair projects, as Stan Pennington of South Carolina based IntelliTurf Franchise, Inc. describes.

"With kid's activities canceled, people are at home, noticing things that need to be upgraded. It is sad that so many are out of work and in financial trouble. We feel for them and are doing what we can to help," said Pennington. "But there is another side of that coin. We just completed the largest financial expansion in our nation's history. There are plenty of people out there with money to spend on their properties. Backyard golf greens are very popular right now with courses closed. Bocce and croquet courts, play areas for children, dog runs are all ways people are upgrading their homes."

The same optimism exists for many in repair and improvement, such as automotive businesses and the hardware stores they rely on. More well-positioned businesses include those in the medical and healthcare industry, wholesale distribution companies and pest control services, among others.

Market Outlook

As Warren Buffett famously stated, to be a successful investor, one must "be fearful when others are greedy and greedy when others are fearful." According to BizBuySell's survey, 82% of owners are concerned about the COVID-19 pandemic impacting their business, leading one to believe we are at the latter end of Buffet's quote.

Most business owners also believe business will be back to normal within 7-9 months, according to BizBuySell's survey, with the highest percentage expecting a recovery in 4-6 months. Owners are encouraged by the job the federal government is doing to help small businesses. 55% believe the federal government is doing a "good" to "very good" job. Another 23% said "average", with the remaining indicating "poor" to "very poor" at 13% and 9% respectively.

"I'm very optimistic with the programs they have set up in place, now I am interested to see if they are as easy to get as they say they are," said Tisdale. "If they are, then I think it won't make everything better, but it surely gives a shot in the arm that we need on the road to recovery."

What is certain, as the sudden onset of COVID-19 has shown, is that the situation can change quickly. Rather than speculate, the more prudent action is to prepare. Whether you were planning to sell prior to the pandemic or not, you must continue with an exit plan in mind.

"Educate yourself, put together an exit strategy (because this will pass) and do not over extend yourself and take care of yourself," recommends Robert D. Penrose of Penrose & Associates, a real estate agency in California.

Another to cite Buffett, Philip King, owner of Fibrenew North Shore, a restoration business based in Illinois offers this advice, "Stay strong. As Warren Buffett says ‘buy when there's blood in the streets'. Now is your time to improve your infrastructure, improve your skills and be 100% ready for when we come out of this. This is a blessing not a curse."

In 2019, the average sale took 6 to 9 months according to BizBuySell data. That means you would need to start marketing your business now in order to complete a deal before the end of 2020 under normal circumstances. Factor in SBA loan processing in a time where hundreds of thousands of applications are being submitted weekly and it's fair to expect delays. Of course, finding a cash buyer or a willingness to accept an earn-out deal could accelerate that. Regardless of timeline, use this opportunity to make your business more attractive and valuable. Do all the things you've been too busy to do in the past. A fresh set of paint or a documented workflow can go a long way toward a transition when you are ready. Perhaps made most evident by the current landscape is the need for a proper online presence.

"Use this time to clean up your act. Fix your website, clean up accounting, do customer outreach and so on. Time is not wasted," advised Brad G., owner of The Hero Day, an Ohio based family entertainment center.

Hinkle added, "Use this time to evaluate if staying in business and riding this out is the best thing for you, your family, employees, and the communities served. If yes, then now is the time to adapt and build or enhance your online presence.

If you are planning to buy a business, research your financing options and learn how to apply for the SBA 7a Debt Relief Program. The deadline is September 27th and you want will want your application ready to qualify for the 6 months of paid principal and interest.

While the date of a return to normalcy is unknown, once the country does re-open, there is optimism that Americans will bombard their local small businesses. "My sense is that once the pandemic is over and a vaccine or remedy for the virus is in place, lenders and buyers will come back into the marketplace and things will get back to normal or be even better given all the pent-up demand," said Coletta.

To owners feeling panic at the forefront of the coronavirus epidemic, consider the advice of Sherrie Wenzel, owner of Safariline, an Illinois based travel company specializing in African safari's. "Be patient and calm. Reduce your expenses to the minimums. Work with your local banks and creditors. We will get through this eventually. I started my experience in the travel industry during the air traffic controllers strike and have seen the industry prevail though economic downturns, 9-11, the Great Recession and more. People will start traveling again."

Q1 2020 Small Business Financial Health

While transactions were down in Q1 compared to the prior year, the financials of those sold businesses remained strong. The $600,000 median revenue is just shy of the record-setting $601,380 generated in Q2 of 2019, and represents an 11% jump from the same time last year. Median cash flow followed suit, also up 11% to $129,548, and again just short of the Q2 2019 number of $130,000.

These historically high financials help visualize the strong trajectory the small business market was on prior to the pandemic. These values also serve as a reminder of the high upside associated with owning a business. While it's not without risk, those who play their cards right and acquire the right business now, may see tremendous growth once the pandemic is behind us.

Q1 2020 Small Business Values

The $250,000 median sale price of businesses sold in the first quarter was an 11% lift from Q1 of 2019, but fairly level with the three prior quarters and matching the median sale price for 2019 overall. However taking a closer look, the price is an exact match to the median sale price for 2019 as a whole. Interestingly, the $286,000 median asking price in Q1 2020 was higher than the $275,000 asked for during 2019. It appears owners entered 2020 with a desire to cash out at higher values, but buyers were unwilling to comply due, likely due to growing pandemic concerns.

The challenge moving forward will be in assessing a fair business value, when many businesses will have little to no profit for the duration of a government ordered shutdown. Generally business values are determined by revenue and cash flow over a 2 to 3 year period. Despite the pandemic, it's only natural for owners to desire prices based on that long term track record.

Buyers, on the other hand, will want to negotiate based on recent activity levels; reduced customers, reduced cash flow, reduced value. As such, owners should prepare for FF&E offers, most typical in asset sales. To bridge the gap, both parties should look for creative ways to provide value and mitigate risk, such as lease negotiations and earn-out deals where the seller and buyer are both vested in continued success. Due to this complication, it's more important than ever to involve a business broker to assist with assessment and negotiation.

Q1 2020 Industry Breakdown

The biggest winner of the first quarter was the service sector, which saw the least transaction decline (down 5%) compared to a year ago, but also the highest sale price (up 20%). This aligns with Calvacca's insight on the continued success of businesses in that sector. Owners in other sectors are taking note and working to replicate some aspects of their offerings as such. Perhaps the most common form is in the restaurants sector, where shifting from dine-in to take-out and delivery, is vital.

According to Calvacca, there is still demand to acquire restaurants that are able to successfully transition their business model. "You can absolutely sell a restaurant today. Especially if you have a small dining area, then shift to take out and use that area to support your operations. In general if you are setup as a to-go type business, you have more value."

Yet another sector set to benefit from a modified business model is retail, which saw a 5% decline in sale price along with a 14% decrease in transactions compared to Q1 2019. While retail shops are no doubt seeing less foot traffic, those with a functional e-commerce setup can continue to operate at a high level.

Q1 2020 Top Performing Markets by Sales

At the local level, among areas with at least 25 transactions, Phoenix saw the largest transaction increase, up 92% from Q1 2019. Other cities with a positive bump include Seattle (up 52%), Sacramento (up 32%) and Nashville (up 10%). The city with the largest drop in transactions was Miami, down 41% from a year prior, followed the nearby Orlando, down 35%. San Francisco and Detroit followed, down 34% and 32% respectively.

In terms of sale price, Seattle commanded the highest median sale price as $387,000 followed by New York-New Jersey at $350,000. Boston ($330,000), Philadelphia ($315,000), Denver ($306,000) and Dallas followed as the other markets above $300,000. Houston businesses received the least with a median sale price of $120,000.

Q1 2020 Top Performing Markets by For-Sale Listings

Of cities with a minimum of 100 active for-sale listings, St. Louis saw the most new listings, an increase of 60% from this time last year. Other cities with double digit growth include Pittsburgh (up 23%), Oklahoma City (up 18%), Tulsa (up 16%), Charlotte (up 11%), and Milwaukee (up 11%).

Kansas City saw the largest decline in business listings, with the number falling nearly 21% from the previous year. Others cities with listing decline include Rochester (down 17%), Louisville (down 16%) and Las Vegas (down 14%).

For buyers hoping to own a small business with less capital, the lowest median asking price of eligible markets occurs in Virginia Beach at $195,000. On the other coast, Orange County median asking prices sit at $199,000, followed closely by Sacramento ($199,250). The highest asking prices can be found in Milwaukee at $472,500 and Louisville at $420,000.

Q1 2020 Differences by Deal Size

The nationwide median sale price of small businesses sits at $250,000, however 13% exchanged for over $1 million in the first quarter of 2020. The majority of these businesses fall under the service industry (40%). Larger transaction numbers are also seen in the retail industry (17.6%) and manufacturing (10%).

Owners of businesses that sold for over $1 million found their business on the market for 207 median days compared to the national average of 182. They, however, had higher multiples with a 3.67 average cash flow multiple compared to the national average of 2.28 for all business sales. The revenue multiple stood at .84 vs .57 respectively.

About the BizBuySell.com Insight Report

The BizBuySell Insight Report is a nationally-recognized economic indicator that tracks the health of the U.S. small business economy. Each quarter, BizBuySell analyzes sales and listing prices of small businesses across the United States based on approximately 50,000 businesses for sale and those recently sold, reporting changes in closed transaction rates, valuation multiples and other economic indicators for the small business transaction market. Closed transactions are reported to BizBuySell.com on a voluntary basis by business brokers nationwide. Each report includes real small business data on over 70 major U.S. markets and across 65 small business industries.

BizBuySell is the largest business for sale marketplace online, receiving over a million visitors a month. Since 1996, BizBuySell has offered tools that make it easy for business owners and brokers to sell a business, and potential buyers to find the business of their dreams. The website also features an extensive franchise directory as well as an easy-to-use business valuation tool.

NOTE: For the most recent statistics, please see the latest BizBuySell Insights Report