Small Business Acquisitions Rise to Multi-Year High, Sale Prices Up 25% as Buyers Focus on Performance and Stability

Small business acquisitions reached a familiar milestone in the second quarter after growing 5% over the past year and 3% from last quarter, according to BizBuySell's Insight Data, which tracks and analyzes U.S. business-for-sale transaction and sentiment from business owners, buyers, and brokers. A total of 2,448 businesses were reported as sold in the second quarter of 2024, representing an enterprise value of $1.9 billion, which is 20% higher than the same time last year.

After falling 13% in 2022 amid rising interest rates and red-hot inflation, transaction volume has made a strong rebound and now matches 2019's pre-pandemic levels. At the same time, demand has pushed the median sale price up 25% year-over-year to a record high of $375,000, as buyers continue to focus on businesses with strong financial performance. The median revenue of businesses sold in Q2 2024 grew 4% year-over-year and median cash flow grew 7%, respectively.

This dynamic of moderate growth and heightened demand for premium businesses is occurring as inflation is cooling, with the Bureau of Labor Statistics reporting that the Consumer Price Index (CPI) dropped to 3.0% while unemployment rose to 4.1%. With interest rates expected to be cut relatively soon, this opens the path for a boon to an already rising business-for-sale market. According to BizBuySell's recent small business survey, 24% of business buyers say they are waiting for interest rates to decrease before making a purchase.

Savvy Buyers Leverage Alternative Strategies to Offset High Borrowing Costs

Most business buyers are not hesitating to pursue opportunities. They're moving forward and looking for strategies to offset higher borrowing costs, with 58% intending to negotiate a lower purchase price, the most head-on method. Buyers are also shopping around for lower rates (42%) or alternative financing methods (42%), increasing the down payment (30%), and seeking shorter loan terms (21%). For particularly strong businesses, the ultimate concession will likely be in the form of an accommodating deal structure.

Max Friar, managing partner of Calder Capital gives his perspective on the 2024 business-for-sale market, "This year continues to be marked by what is in my opinion a lower supply of high-quality (consistent, strong cash flow) businesses versus persistent demand from buyers - entrepreneurs, strategics, and private equity ‘bolt-on' acquisitions. Despite rates remaining persistently high, valuations and deal structures are remaining strong because buyers want to transact, and they are fighting each other for the quality deals."

Sellers More Willing to Offer Financing and Earnouts to Accommodate High Rates

As the business-for-sale market adjusts to today's high interest rate environment, seller-accommodated deal structures have become more common. Moreover, banks have tightened their lending standards and small businesses are more sensitive to higher borrowing costs. This leaves many sellers in the position of having to get comfortable with structuring the deal, including financing and earnouts, whereby the seller must ‘earn' part of the purchase price based on performance.

"Deal structure has shifted to reflect less senior debt appetite given the higher rates. This means more seller financing and a lot more earnouts than before. The biggest shift has been the quantity and volume of the earnout in the deal...even as high as 50% in recent cases," said Sam Scharich, buy-side director at Calder Capital.

In fact, sellers are more open to seller financing, with 24% of owners saying they will now consider it, compared to 21% last year. Of those opposed to seller financing, this year 44% say they will not offer it versus 51% last year. This is good news for buyers, 65% of whom consider seller financing either extremely or very important. Among sellers open to offering financing, 23% are willing to go as high as 50% of the purchase price.

Katrina Loftin, founder and managing partner of M&A Business Advisors explains the benefit of seller financing in today's environment.

Business Buyers View Financial Performance and Stability as Most Important

While buyers consider many factors when purchasing a business, the majority (42%) say financial performance is the most important, followed by growth potential at 26%, and location third at 15%.

As has been the case for several years, buyers continue to favor stability when evaluating opportunities. When looking at today's market, 69% of buyers view recession resistant businesses as the most desirable opportunities followed by thriving businesses at 38%. Twenty percent (20%) are willing to take on a little more risk in the form of a ‘fixer upper', discounting performance for a lower purchase price, while 11% are seeking a closed business to acquire the location or assets only.

As buying a business becomes more mainstream, a new generation of entrepreneurs with perhaps less hands-on experience, but a strong understanding of return on the dollar has entered. Among the most notable entrants, 35% of today's buyers identify as a corporate refugee, exiting corporate America for the independence of small business ownership. Furthermore, 14% are recently retired, and 12% are recently unemployed.

"The market is flooded with entrepreneurs interested in buying businesses despite interest rates. This surge in popularity is reflected in the many courses that have spawned in universities and colleges teaching entrepreneurship through acquisition. Caution not everyone qualifies to buy a business or should be in business, however I'm seeing more of a younger demographic looking into business ownership than in years past," said Emmet Apolinario, CEPA, CVB, of Ohio Business Advisors.

Small Business Owners Say Performance Has Improved, Customers Adapting

As the rate of inflation trends downward, over a third (34%) of owners surveyed say their business performance has improved since last year, with 58% crediting an increased number of customers. While 67% of owners say higher costs have led them to raise prices, it has not necessarily deterred customers. In fact, 65% of those owners raising prices say customer response has been neutral.

"(My customers) accept increases with little resistance as long as they can pass them along to their customers. End users seem to have lost the will to argue about constant increases," explains one Michigan based manufacturing business owner.

Yet, that's not to say high inflationary costs are easily passed off and no longer an issue. In fact, 77% of owners say they've noticed a change in customer behavior due to today's economic conditions. Three out of four (74%) owners have observed an overall caution in spending, while 60% say customers are selecting cheaper alternatives. Fifty-nine percent (59%) indicate reduced purchases frequency, with 41% seeing increased demand for discounts.

"Approximately 66% of our customer base has reduced their business support with us but continue to support our business. The remaining 34% of our customer base continue with us with essentially no change in purchase behavior or pattern," said John E. Haines, owner of JE HAINES & CO (JEHCO) Auto Services in Arizona.

Furthermore, 70% of owners say inflation is not easing with an unsurprising 90% saying their expenses have increased in the past year. Business owners are putting most of the blame on the cost of goods (72%), followed by insurance (64%), then fuel and energy (61%).

While many businesses can pass higher costs onto their customers, others face thinner margins and dwindling sales. Consumers, who are already hit with the high cost of food, mortgages, and credit rates, are cutting back on non-essential purchases, such as home improvements, furniture, and other high-ticket retail items. Instead, they're making room in their budget for entertainment, travel, recreation, and other service-sector purchases.

Service Sector Prices Jump 17%, Manufacturing 31%, as Buyers Focus on Profitability

The business-for-sale market has been buoyed by steady demand in the service and manufacturing sectors, which have been more successful navigating rising costs and changes in consumer spending habits.

Service businesses that sold in Q2 showed a 17% year-over-year jump in the median sale price, with the median asking price up 14%, respectively. Service businesses also showed stronger margins, with median cash flow up 3% year-over-year while median revenue remained unchanged. Overall, the number of closed transactions dropped 5%, however, activity was strong in entertainment, recreation, medical practices, and cleaning businesses.

At the same time, the number of manufacturing businesses sold in Q2 soared 35% since last year, with the median sale price up 31% and the median asking price up 49%, respectively. Manufacturing businesses that sold also showed exceptionally strong earnings, with median cash flow up 12% and median revenue up 36%. While the manufacturing sector is diverse and highly specialized, buyers primarily focused on investing in the manufacturing of food products, machinery, and signage.

Retail and Restaurant Sectors Attract Fewer Buyers, Restaurant Sale Prices Drop 6%

After strong year-over-year gains for three consecutive quarters, retail sector transaction growth took a small breath, down 2% compared to last year, with the median sale price down 4%. These businesses also showed weaker financials, with median cash flow 10% lower than last year and median revenue remaining flat.

Similarly, the restaurant sector was less active in Q2 with transactions flat year-over-year. The median sale price dropped 6% from this time last year, however, it remains in line with last quarter. Unlike retail businesses, restaurants have reported continual year-over-year revenue growth. That is until Q2, when revenue dropped 9%, showing its first decline since Q4 of 2022. While sales may have dipped, margins are improving with median cash flow up 6% in Q2 after a 4% gain in Q1.

Market Outlook

Heading into the second half of 2024, the business-for-sale market is expected to continue growing at a modest pace. While costs remain high, businesses are adapting to this new environment and finding ways to maintain profitability. In fact, 37% of owners expect their business value to increase over the next year.

At the same time, key economic indicators signal rate cuts on the horizon, with many analysts expecting an announcement during the September Federal Open Market Committee meeting at the latest. Under these conditions, buyers can expect to find great opportunities with increasingly favorable terms.

It's also looking more and more like an ideal time for sellers to exit their business. The presidential election is just around the corner and Donald Trump is widely favored in the small business community. Of business owners surveyed, 53% say they believe he will have the best impact on small business, compared with only 14% to Joe Biden and 3% to Robert F. Kennedy, Jr.

"[The election outcome] will be interesting. We expect rates to start declining regardless of who wins. If we move into a situation where taxes may increase, we should see more sellers either rush to the market or wait another 4 years. If the opposite occurs, the market should remain steady. Either way, there are still a lot of baby boomers that will retire in coming years which should keep the market steady," said Loftin.

While politics and economic soundbites occupy the media headlines, ultimately, the main market driver comes down to individual circumstances. Seventy-eight percent (78%) of owners indicate personal reasons will decide their time to exit versus just 22% letting market conditions decide their fate. Furthermore, retirement remains the number one motivation for selling as indicated by 45% of soon to be exiting owners. While the impact of the election can be debated, the reality that 10,000 Baby Boomers retire each day is likely the most important element to fuel the market forward.

Garrett Monroe, sell-side director of Calder Capital shares his outlook for the business-for-sale market.