Small Business Acquisitions Dive in April Before Rebounding to Close the Second Quarter

After government mandated shutdowns led to a 51% drop in business-for-sale transactions in April, activity returned as buyers seek opportunity and to acquire prime commercial real estate and distressed assets.

Small business transactions dropped 39% in the 2nd Quarter of 2020 according to BizBuySell's Insight Report, a nationally recognized economic indicator which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide. This represents the largest year-over-year decline since the Great Recession, when transactions dropped 50% in the 2nd quarter of 2009.

The second quarter of 2020 began with government mandated shutdowns postponing deals as owners focused on maintaining operations while buyers waited for the dust to settle. Lack of clarity over which businesses were "essential" versus which were required to close and for how long made for an especially challenging market.

"We closed voluntarily for 2 weeks when I couldn't get an answer from the state whether we could stay open or close. We later chose to reopen and do porch deliveries only, as restaurants were allowed," said Muffy Sanders of Sander Ranch Flowers in Colorado.

During the first week of July, BizBuySell surveyed 3,181 small business owners and buyers to learn how the pandemic had impacted their business or buying decisions. According to the survey, 20% of business owners closed their doors as a result of the pandemic, with another 32% suspending partial operations.

At first, and fearing the worst, many buyers paused their search. Others, wanting to move forward, were unable to due to lenders freezing loan approvals. This dynamic combined with dried up cash flow for impacted businesses complicated short-term exit plans and resulted in some owners pulling their businesses off the market. An early April survey of business intermediaries conducted jointly by the IBBA, M&A Source, and Pepperdine Graziadio Business School indicated that nearly half of transactions were being delayed due to the pandemic.

Jay Offerdahl, President of Charlotte based Viking Mergers & Acquisitions, described the situation as a "giant pause", with fear of the unknown paralyzing all parties. "Buyers and lenders didn’t want to close, while sellers would panic at any hesitancy and immediately want to find another buyer," said Offerdahl.

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.

"I have just purchased my business," said Troy Ross, owner of Diamond Design Precast, a manufacturing business in Washington. "Sales remained steady during the shelter in place and I decided to move forward with the purchase, though loan processing was a bit slow."

After a 51% year-over-year decrease in April transactions, consecutive 12-point gains in May and June shrank the deficit to 39% and 27% respectively. Over the same period, the number of buyers searching and inquiring about businesses on BizBuySell recovered then eclipsed pre-pandemic levels.

"The panic changed toward the end of May. At that point, we understood what we were dealing with, and the appropriate way to view financials in light of it," said Offerdahl. "Demand recovered, listings started to return, and deals were happening again."

High Demand for Booming Businesses

According to Andy Kocemba, President & CEO of Calhoun Companies, a Minnesota based brokerage, there are two prevailing types of buyer opportunities in today’s market. The first and larger group are those seeking a profitable, pandemic resilient businesses. Sixty-six percent of surveyed buyers indicated a preference to buy this type of business, with 44% searching for a that is growing under current conditions.

In many cases, these businesses are not just withstanding the pandemic, they are absolutely thriving. COVID-19 has dramatically realigned American needs, with consumer demand for certain service and retail shops at all-time highs. For example, as consumers tire of meal planning, grocery shopping, and cooking, there has been a surge in demand for quick-serve, take-out and delivery restaurants.

"May sales have doubled to where we now plan to acquire an existing business to strengthen our current one," says Chris Giffen, owner of Hurricane Pizza Grill in Pennsylvania.

Elsewhere, Stephen Rast, owner of Tobacco Cabana in Texas, also reports doubling revenue during the pandemic, while the well-publicized increase in demand for alcohol is tempting Ish Pandher of Garcia Liquors in New Jersey to extend operations. "Liquor retail is doing well," says Pandher. "I want to move full-time to run a business. I am presently doing this on a part time basis."

Kocemba provides the following guidance for buyers, "If your goal is to buy a business that has been profitable during the pandemic, you’re going to pay a premium for the reduced risk. The business is withstanding a pandemic after all, so it should be good to go moving forward."

In fact, according to BizBuySell data, the median sale 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 business of this type while expecting a favorable price.

"If anything, the last few months has made my business more marketable," says Alison Hall, owner of the UPS Store in Pennsylvania. "We only experienced a 20% dip in revenue for April and May but have rebounded nicely and are actually up for the first 6 months of 2020 over 2019."

While logistics, pizza and alcohol are obvious business types to see demand during the pandemic. Kocemba encourages buyers to be creative when finding opportunity in the market.

"Take little league baseball for example. Due to COVID-19, kids can no longer share a baseball bat, so now bat manufactures are seeing a huge spike in demand. And there’s plenty of opportunities like this out there."

In another example, as more Americans are forced to stay home, the need for at-home entertainment increases. "I manufacture wood jigsaw puzzles and my business has exploded over the past four months," says Jeffrey Campbell of Tau Publishing, LLC.

Countless other examples remain as demand for essential businesses and those catering to the stay-at-home, social distancing lifestyle COVID-19 has created. Other businesses flourishing during the pandemic include home improvements stores, gas stations, pet supply stores, bike shops, home healthcare services, cleaning services, auto repair, pest control and bakeries, to name a few.

Although these thriving businesses are the most sought after, limited supply of these opportunities will require fast action and careful negotiation. Of surveyed business owners, just 18% have experienced increased customer demand since the onset of the pandemic, with an additional 23% sustaining pre-pandemic demand. These numbers will increase as time goes on, but so will buyer demand for these growing businesses.

Buyers Want to Acquire the Dip

While most buyers desire sustained cash-flow, the second group of buyers referred to by Kocemba are those seeking lower 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. Twenty-eight percent, however, are actively searching for a depressed business to hold until conditions improve.

"The place I bought has a great reputation and runs well already," said Luke, owner of Precizion 509 Gymnastics in Colorado. "Sellers were motivated to retire for the last couple years. I got it at much lower than market value, and no bank involvement. When the economy returns to normal, I'll have a lot of value here without much debt."

Kocemba cautions buyers of these depressed businesses to manage risk. "If you’re looking for value in a beaten-up business, you carry more risk, so buy low and see if you can straighten things out."

Offerdahl advises against buying a business simply because of the price tag. "You have to ask yourself; can you see yourself working there each day? Can you improve the business? Does it make financial sense? Often you will find more success buying a business that is doing well despite the current circumstances, then adding in value 3 to 6 months down the line once you truly understand it."

According to BizBuySell’s survey, 68% of owners experiencing a decline expect it to rebound within the next year. Buyers committed to a depressed or pandemic impacted business should consider this timeline when evaluating how much cash flow is necessary to sustain operations while demand returns to normal.

Rare Commercial Real Estate Opportunity

A deeper look into depressed business acquisitions reveals an attractive opportunity in today’s market with an unprecedented number of businesses expected to shut down. For many, the costs to withstand the pandemic will simply not be worth the return. According to Kocemba, some will be forced to sell specifically to exit the lease they guaranteed but can no longer afford. "In these cases, you’re essentially helping them sell their assets only," says Kocemba.

While asset sales are common in the marketplace, many of the businesses forced to close today were performing well prior to the pandemic and occupy coveted commercial real estate. Now buyers have a rare opportunity to secure prime locations without having to pay for the historical cash flow the business would normally generate. This is especially attractive for owners in good position to expand or upgrade their business. In fact, 58% of surveyed owners are currently looking to buy another business.

"Our market is traditionally challenging from a commercial real estate standpoint," said Brad Stevens, owner of CPR Cell Phone Repair in Washington. "The pandemic has shifted the power from seller to buyer. We may be able to find better locations and lower prices in this environment."

While the restaurant sector has been the sector most throttled by the pandemic, successful restaurateurs may be in the best position to capitalize on this budding trend. According to BizBuySell data, restaurant transactions decreased 54% in Q2 versus 2019, the most of any sector. More eye-opening, the median revenue and cash flow of sold restaurants dipped 13% and 21% respectively, while financials for all other sectors remained flat or increased. This supports the notion that smaller quick-serve restaurants are in demand, while higher priced, dine-in only establishments fall out of favor. Those larger entities that cannot reasonably pivot to a take-out model, are likely to close or sell for discounted rates instead.

"The pandemic will result in thousands of fully built out restaurants not reopening which will present opportunities for many new restaurant operators," said Steve Zimmerman, Founder, Principal Broker and CEO of Restaurant Realty Company. "A major advantage, they’ll have immediate access to the use of hundreds of thousands of dollars in built out equipment and leasehold improvements."

In fact, the California Restaurant Association has predicted that 20-30% of restaurants may close permanently in California alone.

"With several local restaurants choosing to not reopen, it leaves buyers the opportunity to acquire decent locations at favorable prices," said Rob Patterson owner of Big Fish Restaurant Group, LLC in Florida.

Aside from real estate, asset sales are desirable to acquire the equipment and inventory needed for a quick re-opening – and due to depreciation - at lower costs than buying new. According to BizBuySell’s survey, 1 in 4 current owners buying another business are doing so in part to acquire assets.

Asset sales also provide the opportunity to secure employees, which may prove difficult in today’s environment due to the extra $600 in unemployment benefits offered by the CARES Act. In fact, 53% of surveyed owners that were forced to lay off or furlough employees due to the pandemic reported difficulty keeping or re-hiring staff due to the benefit.

"My employees informed me of the extra money they could make staying on unemployment, but I told them this PPP was to insure they had their job and our business stayed afloat," said Liz Larrison, owner of Larrison’s Diner Inc.

While asset sales do not rollover employees to the new owner, they allow for selective rehiring, which offers the advantage of hiring only the best and needed employees.

Market Outlook

Much like the rest of the economy, the business-for-sale market trajectory will depend on whether the country can keep the virus under control to a level where businesses can more freely operate, and customers are confident enough to return. The unknown of future shutdowns, stimulus, and trajectory of the virus fosters an equal level of uncertainty for both buyers and business owners, but as Kocemba states, "you need a little uncertainty to motivate the market."

In the second quarter, the number of businesses listed for sale on BizBuySell dropped 8% 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 as a result of the pandemic, while 20% plan to exit later, and 61% indicated they are not changing their timeline.

"I will continue with my plan to exit. Loan rates are low, and people are eager to invest. My business is doing very well thanks to the PPP and EID that helped maintain my business while I opened again," said Larrison. "We’ve cut our hours until we can open at 100% and we have done very well."

Interestingly, according to Kocemba, the Paycheck Protection Program, which was created to help owners stay in business, is now preventing some from exiting. "The next listing surge will happen when the PPP payment window closes. Owners are confused about the ability for the loan to carry over to a new owner, so they’re choosing to wait to sell rather than risk having to pay back the loan."

According to Michael Baumann, Founder and CEO or YourSBA.com, PPP loans are transferable if done correctly.

"Most banks are willing to accommodate this type of transaction via a stock sale, in which the buyer acquires the seller’s stock in the company, protecting against loan repayment using a shared escrow account. Per the SBA.gov PPP Loan FAQ, asset sales should fit the approved transfer criteria as well," said Baumann. "Furthermore, if the loan was obtained before June 5th, per the SBA, the buyer can ask the seller to request forgiveness or permission to pay off the PPP loan after the originally established eight-week period."

Offerdahl expects an equally large surge in supply to soon come from Baby Boomers.

"COVID-19 served as a wake-up call for Baby Boomers. Normally married to their business, these owners have been forced to stay home, as have their friends, and they’re starting to realize it’s okay. They’re enjoying spending time with loved ones. Slowly, these owners are understanding that they’re not retiring from something, they’re retiring to something," said Offerdahl.

Kocemba echoes this sentiment, saying "We’ve barely scratched the surface of Baby Boomer supply and as the pandemic continues, any increase in uncertainty will propel these owners into the market."

Regardless of motive, sellers will be met with a wealth of demand once they enter the market. In the short term, the CARES Act is motivating buyers to act quickly in order to qualify for 6-months of paid principal and interest payments for 7a loans closed before September 27th, 2020, with no obligation for repayment. From the BizBuySell survey, 39% of buyers are hoping to take advantage of this benefit, with just over a third willing to pay a premium to meet the deadline.

In addition, as record unemployment rates leave millions of Americans without a paycheck, many are seeking more control of their future through business ownership.According to BizBuySell’s survey, 28% of buyers are newly unemployed. Finally, many buyers are business owners themselves, looking to expand their footprint or add products and services through vertical integration.

For those owners considering selling their business, and even those that aren’t, economic volatility is making it more important than ever to talk with a business broker. If nothing else, it’s important to understand market conditions. More so, most brokers also provide professional valuations, so you can understand your value today and develop a plan to either capitalize on it now or build on it for the future.

Q2 2020 Small Business Financial Health

Despite the steep decline in the number of Q2 transactions, the financials of businesses that sold remained flat to slightly up year-over-year. The median revenue of sold businesses declined an insignificant 0.2%, from $601,380 to $600,000, while the median cash flow increased 5.6% from $130,000 to $137,293.

Even in a pandemic, high performing businesses hold value. This is driven by two factors: (1) the low risk in reliable cash flow, and (2) lower availability of these type of resilient businesses on the market. For these business owners, it’s important to assess the likelihood of continued success and adjust plans accordingly. For example, owners thriving mainly due to dine-in closures, should consider whether they’ll be all to sustain similar value when restaurants fully open and patrons feel safe to return at the capacity prior to the pandemic. If the answer is no, perhaps now is the time to exit.

"Curbside service was good until people started returning to work," said Gerald Swayne, of Jerri’s Catering in Ohio. "Our business has since dropped off to the point we no longer do weekends."

Q2 2020 Small Business Values

The bid-to-ask ratio of transactions increased by half a percent year-over-year to 0.92 due to rising sale prices despite asking prices remaining flat. The median sale price of sold business was $286,500, a 6.1% increase over the $270,000 a year prior. Once again, a lower supply of high-performing businesses is giving sellers the edge at the negotiating table. Of course, a buyer’s market likely exists for underperforming or distressed businesses, however those transactions make up small percentage of total sales for the quarter. The deals that did make it across the finish line in the challenging second quarter were stronger businesses where buyer confidence existed that they would thrive moving forward.

As an interesting subpoint, while Baby Boomers continue to enter the market, Offerdahl notes that the older generations’ accounting practices make valuing those businesses more complex.

"These owners have long been running to minimize tax implications. That’s fine to minimize expenses in normal times, but come time to sell, their books show little value," said Offerdahl. "As a solution, I work with the owner and their CPA to move all owner perk expenses to owner distribution going back to January 1st, 2020. Banks can operate off one year of financial performance, so once they file their 2020 tax return with these corrected financials, they have a mechanism to support value as well as justify an SBA loan if the buyer chose to go that route."

Offerdahl also lends an example to the bigger picture of minimizing tax implications when it comes to short term saving versus maximizing business value. "Say a business owner writes off $100,000 in owner perks. Depending on their tax bracket, they’re likely saving $35,000 or so, which is nice in the short term. However, with cash flow multiples in the 2 to 2.5 range, that same $100,000 could tack upwards of $250,00 to the sale price."

Q2 2020 Industry Breakdown

As has been well-publicized, the restaurant industry has taken the bulk of the impact from the pandemic. BizBuySell data supports this at a high level, with second quarter restaurant transactions dropping 54% compared to 2019, the most of any sector. Financials for these businesses also fell, with median cash flow and median revenue decreasing 13% and 21% respectively. The lower financials led to a 25% drop in sale price.

In contrast to restaurants, and despite a similarly large 42% drop in transactions compared to 2019, all other retail businesses saw financials swing heavily in the opposite direction. The median cash flow of retail businesses grew 13%, with revenue increasing 5%, leading to a 28% spike in sale price.

At the surface, this comparison would seem to indicate much more value in owning a traditional retail business versus a restaurant. Digging deeper, another theory for this could be that both sectors are mightily impacted, just on different sides of the spectrum.

For restaurants, the businesses that have been able to withstand the pandemic are those able to adapt to the quick-serve, to-go model. Generally, these are smaller businesses, with strong, yet lower financials compared to the high priced dine-in variety. As a result of more demand for these smaller businesses, transaction financials are skewed lower.

Conversely, high-performing retail businesses tend to exist on the larger end, with high demand for gas stations, hardware shops, grocery stores and the like. Opposite to restaurants, lower value retail businesses are the ones with elevated risk and lower demand. So, with larger businesses in demand, transaction financials skew higher for retail sales.

In today’s environment, it’s more important to look at what the businesses represent rather than their respective categories. In each of the above examples, what buyers are really seeking is security in low risk businesses. Kocemba describes this more concisely, "Regardless of the times, the thing that business buyers are after is cash flow." Of course, not all can afford it, which is why there is demand for fixer-uppers that can be had at the right price to offset risk.

With that in mind, the safest businesses may exist in the service sector. The 31% drop in year-over-year transactions for these businesses was among the lowest of any sector which is notable. Most impressive, business and transaction financials remained flat year-over-year, with a 5% drop in sale price being the largest swing. As many service businesses respond to consumer necessity and not always desire, demand is likely to remain stable for service businesses regardless of economic conditions.

Q2 2020 Markets by Sales

Markets with the worst decline in year-over-year sales correlate directly to the areas hardest hit by COVID-19. The New York City market, which experienced the most cases at the onset of the pandemic in March, reported just 57 transactions in Q2. This represents a 65% decrease compared to the same time last year and the first-time quarterly transactions were under triple digits since Q4 of 2015 (91 transactions). Miami and Los Angeles, two other COVID-19 hotspots, followed New York with a 62% and 54% drop in transactions respectively. Interestingly, while Arizona is another state facing a growing number of COVID-19 cases, transactions in the Phoenix market grew 40% versus Q2 of 2019. It’s worth noting that Phoenix has been seeing steady transaction activity since Q3 2019, averaging 77 transactions per quarter over that period after averaging 52 the first half of 2019.

While Chicago saw a drop-off in transactions (49%), businesses that sold commanded a median sale price of $650,000, the highest of any market. This appears to be driven by the sale of multiple high-priced service and manufacturing businesses in the area. Atlanta was the only other market with a median sale price above the half million-dollar mark at $525,000, followed by Tampa which was $500,000. On the low end, Orlando businesses sold for a median sale price of $135,000.

Q2 2020 Markets by Listings

Of cities with a minimum of 100 active for-sale listings, only three did not experience a decline in listings over the course of the second quarter of 2020 versus the prior year. Milwaukee and St. Louis saw increases of 23% and 16% respectively, while Oklahoma City remained flat year-over-year. Both Minneapolis and Tulsa declined just 4% supporting the resilience of Minnesota and Oklahoma.

Not surprisingly, markets with the largest drop in listings are on both coasts, areas harder hit by the COVID-19 pandemic, led by the Bridgeport-Stamford-Norwalk part of Connecticut (35%). New York City and Sacramento also saw large dips at 33% and 32% respectively.

In terms of asking price, Milwaukee again headlines with a $400,000 median asking price, the highest of any market. Cincinnati was a close second at $398,000. On the lower end of the scale, the only markets with sub $200,000 asking prices were Virginia Beach and Orange County, California at $198,000 and $199,000 respectively.

Q2 2020 by Deal Size

While $286,000 was the median sale price for all transactions in the second quarter of 2020, 16% of businesses sold north of the $1 million mark. Almost half (46%) of these transactions occurred within the service sector, an uptick from the 40% share of services businesses sold last quarter and an indication of growing demand for services businesses during the pandemic.

Restaurants accounted for 4%, the lowest percent of $1 million+ sales and a notable drop from the 9% in Q1. While restaurants typically reside at the low end of the transaction prices, those at the higher end are normally of the fine dining variety which are less equipped to transform to the take-out and delivery model which has resurged in current times. As such, many of these owners likely delayed their exit, sold at a discount or liquidated via an asset sale, all of which would contribute to the lower share of high-priced restaurants sold. While a lower percentage of $1 million+ restaurants exchanged during the second quarter, it’s important to note that overall demand for restaurants remained strong as is evident by their 19% share of total transactions compared to 21% last quarter and 22% at this time a year ago.

Overall, the median days on market for all small businesses sold in the 2nd quarter was 196 days, a 7% increase over the same period in 2019. While higher-priced deals typically take weeks longer to complete compared to the overall market, in Q2 2020 these businesses sat on the market for just 6 more days. For context, in Q1 of 2020, $1+ businesses sat on market 25 days longer than the overall median and 15 days longer for all 2019.

Taking a deeper look, this was caused by lower priced business taking longer to sell, rather than higher priced businesses selling faster, with the median days on market for $1 million+ businesses increasing 2% over the same period in 2019. Consistent with transaction trends across the marketplace, businesses able to maintain high performance continue to see similar demand as prior to the pandemic.

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