Small Business Acquisitions Level Out in 2023, Sale Prices Rise 6% as Interest Rates Plateau

Closed Small Business Transactions

Number of transactions by quarter as reported on BizBuySell.com

Source: BizBuySell.com

Despite a strong fourth quarter, 2023 small business acquisition numbers were largely unchanged from 2022, according to BizBuySell's Insight Data, which tracks and analyzes U.S. business-for-sale transactions and sentiment from business owners, buyers, and brokers. A total of 9,093 businesses were reported sold on BizBuySell in 2023, representing an enterprise value of $6.5 billion, compared to the previous year's 9,054 at $6.3 billion value, respectively.

Over the course of 2023, transactions followed a U-shaped pattern that corresponded with the Federal Reserve's historic 11 consecutive interest rate hikes. After already dropping 13% in Q4 of 2022, transactions dropped 10% in the first quarter of 2023, then remained flat in the second and third quarters as hikes slowed, before giving way to a 12% gain in the fourth quarter with news of cooling inflation and potential rate cuts.

Ken Bohenek, business intermediary at Murphy Business Sales in Northern Idaho, adds, "If the business has a good return on the investment and ability to service debt, it's likely a good time to buy, regardless of rates. If the above is true, then as rates soften, you'll likely be in a much better cash flow position than those who bought when money was cheap, and rates quickly escalated. Don't lock in rates either."

With interest rates expected to decline in 2024, acquiring a variable rate loan now, which is tied to prime, can potentially enhance cash flow once rates drop and repayments become lower. SBA 7(a) acquisition loan give buyers the option of choosing either a fixed or variable rate, depending on the lender.

Still, variable rates are not without risks. Lisa Riley, CEO and M&A Advisor at Delta Business Advisors, stresses the importance of buyers weighing their options. "It's crucial for buyers to consider the overall market trends and their risk tolerance when deciding between fixed and variable rate loans. Fixed-rate loans provide more predictability and stability in repayments, regardless of market fluctuations, while variable rate loans can offer initial savings but come with the risk of increasing over time."

Business Values Surge in 4th Quarter as Buyers Focus on Reliable Cash Flow

Median Sale Price vs. Asking Price

Median asking and sale price of small businesses as reported on BizBuySell.com

Source: BizBuySell.com

Businesses bought in 2023 showed stronger financials compared to the previous year, also exhibiting a U-shaped pattern with values surging in the 4th quarter. Median cash flow grew 13% in the final quarter, finishing the year with a 4% annual gain, while median revenue gained 16% and 6% respectively. This activity underscores small business resilience despite current economic conditions. It also suggests buyers are still willing to invest in great opportunities.

"The demand for businesses in attractive market segments with consistent cash flow remains high, particularly when sellers are willing to entertain financing options," adds Charles P. Spickert, CBI, of Touchstone Business Advisors.

As financial performance strengthened, businesses sold at higher prices. The median sale price rose 6%, from $315,000 to $335,000 year-over-year. After remaining flat in Q1, prices dipped 5% in Q2, before rising 10% and 11% in Q3 and Q4, respectively. Multiples held steady over the course of the year, with the average cash flow multiple declining a slight 1.6% from 2.53 to 2.49 and the average revenue multiple down 2.9% from .65 to .63.

The Importance of Seller Financing in Today's Market

While businesses that show a steady return can have less difficulty finding a capable suitor without having to accommodate for the high cost of capital, turbulent businesses will likely have to make concessions. Offering to finance a portion of the deal may be their best bet without having to reduce asking price.

Yet only 27% of surveyed owners say they are willing to offer seller financing, while 45% will not and 28% are unsure. In contrast, 30% of buyers say seller financing is very important in their purchase consideration, an additional 26% saying it's extremely important.

This disconnect, or stubbornness, in expectations of terms between buyers and sellers is creating additional complexities in an already complex market.

"Currently, getting businesses listed isn't the issue, it seems that buyers are too expectant of ‘terms' or owner financing options vs. ‘cash' purchases. Having said that, sellers not willing to do creative financing options and buyers not having, or not willing to look at other alternatives, seems to be a trend I personally have seen," said Marcus Inman of First Choice Business Brokers.

As such, it's of little surprise that 43% of business brokers consider now to be a buyer's market compared to 20% who believe sellers have the upper hand. Twenty-seven percent (27%) see a balanced market with the remaining 9% unsure.

Strong Labor Market, Rising Minimum Wages, and Inflation Compound Challenges for Business Owners

Key Financials of Sold Small Businesses

Median financials of small businesses as reported on BizBuySell.com

Source: BizBuySell.com

As unemployment holds below 4%, businesses are struggling to hire and retain workers. In fact, most owners (46%) said the labor market is not improving, with 28% not operating at full staff. Most respondents (44%) blame these difficulties on a lack of applicants, followed by difficulty meeting payroll costs (29%).

Cheryl Danella, owner of Johnny Rae's in New York, says it is a challenge to keep up with larger corporations who attract workers with higher wages and benefits. "Workplaces like McDonald's or Dunkin' Donuts are paying employees $18 and up per hour. That's really hard for small businesses to compete with while trying to offer customers competitive prices for merchandise."

While recent minimum wage increases put pressure on small businesses, many owners are finding workarounds such as hiring contractors or offshore virtual assistants. Still, in such a competitive market, 84% of owners state they are paying above the minimum wage for entry-level positions.

Higher labor costs are just another notch on an already tightened belt, explains Donna Harris, who owns Grand Pet Hotel in Arizona. "With the inflation, minimum wage increases and all prices rising, it shrinks the bottom line," In fact, 65% of business owners say they are still feeling the impact of inflation. Validating this concern, the consumer price index increased 0.3% in December and 3.4% from a year ago.

Furthermore, wages adjusted for inflation posted a 0.2% gain on the month, while rising a modest 0.8% from a year ago. With most owners still being squeezed by high costs, many have little choice other than to raise prices, running the risk of losing customers.

"Costs have gone up in all areas which is forcing us to cut corners or pass the cost to the customer which takes us out of competition as compared to the bigger companies that can stomach the rising costs," said Roni Banerjee, owner of Jaguar Power Sports in Florida.

Complicating matters, the Federal Reserve's primary tool to fight inflation is yet another thorn in the side of many business owners. Over half (56%) of small business owners say high interest rates are negatively impacting their business. With interest rates surging to their highest level since 2002, many owners feel credit is too expensive to consider using for growth projects, such as investing in new equipment or construction.

David G Kiernan, owner of Xtreme Laundry in Pennsylvania, adds, "As a laundry owner and future investor of more, we operate a highly capital-intensive environment. Rates have all but eliminated most investments."

Additionally, higher rates have impacted small business revenue, as consumers are more thrifty and less likely to splurge on luxury or unessential items as they spend more at the gas pump and grocery store.

Demand for Manufacturing Businesses Remains High as Sale Prices Rise 15%

The manufacturing sector showed the strongest performance in 2023, with the number of closed deals up 17% and sale prices up 15%. The median sale price rose from $700,000 to $797,000. Furthermore, these businesses showed stronger financials than the previous year, with median cash flow up 5% and median revenue up 4%.

Demand for manufacturing businesses has increased for several reasons. Since the onset of the pandemic, offshore supply chain disruptions as well as geo-political volatility and a growing demand for advanced automation technologies have made reshoring more practical. Furthermore, tax incentives via the Infrastructure Investment and Jobs Act and the Inflation Reduction Act have made manufacturing domestically increasingly favorable.

Restaurants Continue Steady Post-Pandemic Rebound and Expansion

Since 2021, the restaurant sector has been on a steady growth trajectory. After plummeting 38% at the onset of the pandemic, acquisitions grew 6.5% in 2021, then 20% in 2022, and another 7.6% in 2023. While this resurgence is a positive sign that more buyers are finding attractive restaurant opportunities, acquisitions are still 15% below 2019's pre-pandemic levels.

Though restaurant acquisitions are still in recovery, sale prices have surpassed pre-pandemic values though down slightly this past year. After remaining flat at $180,000 from 2018 to 2020, the median sale price rose 6.5% in 2021, then 9% in 2022, before dipping 4% in 2023. Furthermore, median revenue grew 12% over the previous year, as more people opt to dine out. Stunting momentum, however, are rising costs like food and wages necessary to hire and retain workers. Higher expenses have hurt their bottom line with median cash flow declining 3.6%.

Service Sector Demand Begins to Show Signs of Slowing

Interestingly, the number of service businesses that sold in 2023 declined 6%, which could indicate a tapering off of demand as buyers diversify into other emerging business types. While this sector remains the largest, comprising 41% of the business for sale market and includes a wide range of services, from healthcare to automotive repair, this is the first decline since 2020 when dealmaking activity dropped 13%.

Nevertheless, buyers in 2023 paid higher prices for service businesses with positive financials. The median sale price rose 7% over the previous year, while median cash flow and revenue grew 5% and 4% respectively. Compared to restaurants, this data indicates service businesses have an easier time passing along costs to customers without sacrificing cash flow as a result.

Retail Sector Falls Sharply with Weak Financials and a 12% Drop in Sale Prices

As inflation and rate hikes began settling in, buyers shied away from investing in small retailers. This includes four consecutive quarters of declining transactions, starting with a 10% year-over-year drop in Q3 of 2022, followed by a 21% drop in Q4, and then a 12% drop in both Q1 and Q2 of 2023. Deal activity finally turned in the second half of the year, growing 6% in each of the final two quarters, limiting the overall annual decline to just 4% year-over-year.

Similarly, median sale prices remained weak. After remaining flat to begin the year, prices dropped 22% in Q2 versus the prior year and another 18% in Q3 before rising 7% in Q4. The result was a 12% annual decline in 2023, the sharpest since BizBuySell first began tracking closed transactions in 2007.

This activity is further underscored by weaker retail financials, with median revenue falling 12% and median cash flow falling 3% over the previous year. Small retailers, which are already struggling to compete with Amazon and Walmart, saw their performance further diminish as inflation raised the cost of goods, materials, and staff, while rate hikes made credit increasingly expensive.

2024 Market Outlook

Over the past year, the business-for-sale market has been on a rollercoaster of uncertainty. Between rate hikes and inflation, including the costs of goods and wage growth, not to mention the looming threat of a recession, owners have been fighting to maintain cash flow. At the same time, buyers looking to enter Main Street are facing rising acquisition costs and challenges trying to finance a deal.

Fast-forward to 2024 as inflation inches closer toward the Federal Reserve's 2% target, the hope of a soft landing seems more promising. Demand for labor is still strong and consumer spending is steady, reducing the likelihood of a recession, while signs of potential rate cuts are beginning to offer a little more optimism to those in the market.

However, little has been normal about the post-pandemic economy and interest rates will likely remain high through the first half of 2024. Still, many business owners remain hopeful, with certain sectors benefitting more than others.

Michael Taback, who operates a business in California, explains, "I am cautiously optimistic that the spending public will tire of their own austerity measures. Things will only change when we see interest rates and notice inflation starting to come down. This will help the general public to spend our way into a more vibrant economy."

The presidential election adds yet another layer of uncertainty in terms of spending, taxation and other policies. In fact, among business brokers, the election outcome is their third highest concern (16%), only behind risk of recession (26%), and interest rates (32%).

Of favored candidates, 56% of owners and 58% of buyers say they plan to vote for Trump. This compared to 20% of owners and 21% of buyers who plan to cast their ballot for current President Joe Biden. One of the most notable legislative accomplishments of Trump's tenure was the Tax Cuts and Jobs Act of 2017.

2024 Expected to Bring New Opportunities for Growth and Acquisitions

This ever-evolving political economic landscape, combined with new technologies, will likely propel many small businesses to adapt and transform. The emergence of AI (artificial intelligence) and its potential impact is one such example. While in many ways it is a path to growth, it will also have an adverse impact on certain services.

"I expect there will continue to be disruption among small businesses. Those who learn how to leverage automation and AI will have a distinct advantage over those that do not," says Patrick McDonald, owner of Cygnus Sprints Consulting in Kansas.

Glen Cooper, founder of Colorado Business Brokers, adds, "AI will have an over-the-top impact, even more than most realize. It will cause as many problems as it will solve. But, we will have no choice but to move forward with it."

For buyers, change brings new opportunities. Anthony Constantine, owner of Mountain View Capital Group in Colorado, adds, "I anticipate continued growth and resilience in the small business sector in 2024 driven by a dynamic economic environment and evolving consumer needs. Despite challenges, I expect technology adoption and innovation."

Business brokers echo these sentiments. As interest rates continue to curve downward and the labor market remains stable, most are expecting a renewed sense of optimism in the market. In fact, 66% of brokers believe there will be an increasing number of buyers entering the market in 2024.

Furthermore, 75% of brokers expect more owners will be selling their business. This is also apparent by the large swath of Baby Boomers expected to exit their businesses in the years to come. In fact, 48% of business owners say they plan on selling their business due to retirement.

Mark S. Mueller, M&A Broker and Intermediary for CRE Resources LLC, adds, "I expect a continued mass exodus of owners leaving the business world due to retirement, as well as an increasing number of Millennials both investing and purchasing businesses who are exiting corporate jobs. Also, a high influx of immigrants ‘looking for a job' through business acquisition."

Max Friar, managing partner at Calder Capital, LLC says the increased activity is already underway.

"We can already tell that things are different, as the number of prospects that are responding to our outreach has increased. The stabilization of rates, strong performance of the stock market, and continued steadiness (perhaps even normalization) of the labor market and decline in inflation have given buyers and sellers a sense that overall things are stabilizing economically," said Friar.

Successful Dealmaking Will Hinge on Cooperation and Risk Management

After a rocky interest rate driven 2023, the 2024 business-for-sale market is signaling cautious optimism. That said, for buyers and sellers to be successful, it is likely to come down to risk management and working together to get deals done.

Buyers want to be confident they are taking ownership of a strong opportunity, while sellers want to yield the full return of the business they worked so hard to build. Given current conditions, seller financing looks to be a large part of that solution.

"An owner that is willing to transition their business and have a stake in the future tells me they believe in it. That's just how I look at it. It's less about the money and more about the validity of the business," says Craig Fuller, a business buyer in New Jersey.

As Fuller indicates, when an owner chooses to finance part of the deal, it gives the buyer some peace of mind that the business is accurately represented. It can also turn into more money for the seller.

"Seller financing is always important. Lenders and buyers love a 10% seller note, and I would argue that especially for a strong and growing business, offering ‘limited seller financing' will likely attract enough competition to get more cash at closing," said Max Friar.

Ultimately, while seller financing is important in today's high interest rate environment, the most important part is to have the financials to back up your asking price.

Sherri Ferguson, business broker at Transworld Business Advisors, offers the following motivation for owners considering a sale, "This is going to be an incredible year. Having the correct multiples and your business priced correctly will place you in a category to get your business viewed by thousands of potential buyers and allow them to get the funding necessary."

For buyers, especially those frozen by rates, Tom Zant, vice president of Equity Group of Michigan, adds his perspective.

"Buyers should keep moving forward. No one can accurately forecast the future, so waiting on the Fed to cut is just a delay tactic. And in the meantime, by the time rates come down, that business you have your eye on will be gone," says Zant.

Regarding buying a business from a lending perspective, James Gillis, senior vice president of SBA Government Lending at SouthState Bank offers the following, "2024 is an excellent time to purchase an existing business. Prospective buyers and lenders now will have two years of tax returns, 2022-2023, post-Covid to truly analyze the cash flow of any business."