Lower Business Inventory Drives Premium Prices for Q1 Acquisitions

One year after the onset of the pandemic, entrepreneurs continue to flock to high performing businesses causing median sale prices to jump 30% compared to Q1 of 2020, according to BizBuySell's Insight Report, which tracks and analyzes U.S. business-for-sale transactions and sentiment of business owners, buyers, and brokers.

The $350,000 Q1 median sale price is the highest since BizBuySell began collecting the data in 2007 as are the $680,020 median revenue and $147,752 median cash flow for reported transactions. The latter figures represent a 15% and 8% YOY increase respectively. In addition, higher multiples tacked on a premium to standard performance-based prices, with the average revenue multiple increasing 5% and cash flow 7%.

The current market conditions reflect a dynamic where businesses performing well during pandemic are scarce in the marketplace, while those impacted stay on the sidelines until financial performance improves. In fact, most business brokers (58%) say impacted owners are likely to rebuild value compared to 27% of brokers who say owners are more likely to sell at a discount.

As a result of this supply shortage, transactions declined 12% during the 1st quarter compared to the same time one year ago.

Essential Businesses Not Impacted by Pandemic are Preferred Among Buyers

While many non-essential businesses saw sales decline due to the pandemic, others continued to operate uninterrupted and even flourished under new conditions. According to business brokers surveyed, the most popular businesses sold during the pandemic had either not been impacted by the pandemic (45%) or excelled as a direct result (30%).

Among these resilient businesses, brokers most commonly mention liquor stores, convenience stores, fast food restaurants, pizzerias, gas stations, construction and home improvement businesses, e-commerce sites, medical businesses, manufacturers, and distributors as most in demand.

An analysis of BizBuySell’s Q1 2021 business for sale transactions reveals the largest YOY increases in landscaping and yard service businesses (up 48%), cleaning businesses (up 32%), auto repair (up 31%), liquor stores (up 14%), website and ecommerce businesses (up 9%) and delivery routes (up 7%).

Florida Emerges as the New Hot Spot for Buying a Business

While buyers favored certain sectors, location also influenced decision making. The largest number of businesses are typically bought and sold in California, New York, Florida, and Texas. However, each are different in terms of state governments, economies, and ways of responding to the pandemic.

Overall, Florida reported the highest number of transactions in Q1 2021, a 12% YOY increase. It also has the lowest unemployment rate at 5%, plus lower tax burdens, lower cost of living and affordable housing. Florida is also among the top states for inbound migration.

In contrast, California and New York are among the top states for outbound migration. New York business for sale transactions fell 28%, while California transactions fell 16%. New York’s unemployment rate is 9%, while California’s is 9%. Plus, California and New York imposed stricter lockdowns and battled tough winter surges.

While Texas has a lower cost of living than California and New York, Texas business for sale transactions fell 17%. And while Florida and Texas both have more relaxed pandemic restrictions, Texas got hit hard by a surge of infections over the winter, plus a severe winter storm and power outage. Florida’s infection rate remained relatively flat.

Last Call for Bargain Acquisitions?

Q1 2021 transactions continue a trend of high value businesses changing hands, however buyers surveyed appear to be losing interest in paying the associated premium. Most buyers (54%) say they are looking for businesses only maintaining pre-pandemic performance and 52% would even prefer the discount associated with an impacted business versus seeking one exceeding pre-pandemic levels (37%).

As the country re-opens, buyers may expect businesses benefiting from the pandemic to return toward pre-pandemic performance. Conversely, a return to normal gives way for battle tested non-essential businesses, and specifically those reliant on a “socially close” environment, to re-enter the fold. It’s likely for this reason, most buyers (42%) expect business prices to go up in 2021, indicating a coming end to the bargains of 2020.

Business brokers echo buyer sentiment, with many (45%) describing today’s most sought-after opportunity to be businesses maintaining pre-pandemic performance. Thirty percent (30%) indicated those businesses outperforming pre-pandemic levels.

2021 Small Business Market Outlook

Small business ownership has become a haven for individuals seeking security in times of uncertainty. The pandemic has presented a wakeup call for American workers who have faced job loss or stay-at-home downtime to assess their future. Thirty-seven percent (37%) of buyers say unhappiness with their job and the desire to take control of their future is motivating their decision to buy now. Nineteen percent (19%) are newly unemployed.

“So many people are forcibly revaluating what makes them happy, which leads to a net outflow of people from employment into self-employment,” said John Cook, owner of Quality Expediting Inc. in Michigan.

This heightened demand is likely here to stay, however a resurgence of supply is essential for the market to return to form. According to brokers, this first comes to down to revenue recovery for owners impacted by the pandemic. These owners may even hold out to re-establish pre-pandemic value before deciding to sell. This is especially true for Baby Boomers, notable for holding a large quantity of pent-up supply.

“Given Baby Boomers are typically selling their business so they can retire, it is often their priority to sell for an amount that will last in retirement,” said Baas.

Of course, re-establishing business value requires a sustained recovery. Most brokers (65%) estimate pandemic impacted owners will need between 6 – 12 months to prove recovered sale performance will continue. However, with pent up consumer demand driving an increase in spending, and fewer competitors due businesses not surviving the pandemic, recovery may come sooner than later.

Regulations associated with the Biden Administration are also likely to influence market activity. Most notable are expected capital gains increases. Thirty-one percent (31%) of owners are extremely concerned about taxes increases in 2022, with another 23% very concerned. In fact, 1 out of 5 brokers believe concerns over rising taxes will be the top factor motivating owners to sell in 2021.

Of course, the same factors serving as a catalyst for supply risk curbing demand. Sheila Spangler of Murphy Business Mountain West offers the following to summarize the unknown ahead.

“Baby boomers that have hung on this long may not want to continue during the long-haul of COVID restrictions and the coming tax increases with the Biden administration,” said Spangler. “However, those are also two reasons that buyers may not purchase a business. So, it could be a double-edged sword. Sellers may be willing to sell, the question is, will buyers be willing to purchase what is available?”

Ultimately, if the U.S. stays the course of re-opening, expectations are that buyers will continue to take advantage of what Andy Rosenthal of Lighthouse Business Brokers calls “a perfect storm of boomers ready to exit and potential capital gains tax increases on the horizon.” That said, unique market, sector and circumstance will play a factor. For these reasons, consulting a business broker is normally the best course of action. Even if not ready to act, a broker can guide entrepreneurs on market conditions and create a plan to accomplish their goals.

Q1 2021 Small Business Financial Health

Businesses that sold in Q1 2021 continued a year-long trend of improved performance. The median revenue and cash flow were up 15% (to $688,020) and 8% (to $147,752) respectively year-over-year, representing the highest financials since BizBuySell began tracking transactions in 2007.

This uptick in business performance is also reflected in responses from BizBuySell’s April 2021 survey of business owners. Only 47% of owners reported a decline in customer demand due to the pandemic, compared to 78% a year ago, with 29% saying customer demand has improved and 24% saying the pandemic has had no effect at all.

Q1 2021 Small Business Values

Revenue multiples rose 5% and cash flow multiples rose 7%. Combined with the higher revenue and cash flow of the businesses that sold during the quarter, median sale prices rose 30% year-over-year, to $350,000 from $286,000.

Although Q1 2021 was hampered by winter virus surges and shutdowns, sale prices remained strong, up 8.7% from Q4 2020. At the same time, the number of businesses changing hands was down 12.3%, as many owners felt they’d be better off waiting to sell until the economy picks up.

With strong performing businesses in high demand and short supply, sellers have the advantage, while buyers, further motivated by low interest rates and rare SBA loan forgiveness programs, are willing to pay premium prices. This dynamic is expected to shift this year as the economy recovers and more owners move forward with their exit plans.

Q1 2021 by Deal Size

During the first quarter of 2021, 19% of transactions sold for a price of $1 million or higher. These businesses contained a median cash flow $550,972 and were on the market for 197 days, compared to $147,752 and 190 days nationally for all businesses. The time frame for these larger businesses to sell continues to decline from the high of 216 days seen in the 3rd quarter of last year.

In addition, businesses selling for $1 million or higher averaged a .90 revenue multiple and 3.74 cash flow multiple, significantly higher than the .65 and 2.53 multiples, respectively, for all businesses. Lastly, most of these larger acquisitions occurred in the service industry (34%), followed by retail (19%), manufacturing (12%) and restaurant (4%) sectors.

Closed Small Business Transaction Metrics by Geographic Market for the Full-Year 2020

Key metrics from transactions reported on BizBuySell.com by market during 2020

Closed Small Business Transaction Metrics by Sector for the Full-Year 2020

Key metrics from transactions reported on BizBuySell.com by sector during 2020