Small Business Transactions Reach Record High As Buyers Shrug Off Amazon Effect
BizBuySell.com’s Third Quarter 2017 Insight Report shows this year is on pace to record the highest number of businesses changing hands since the report’s inception in 2007
San Francisco, CA – BizBuySell.com, the Internet’s largest business-for-sale marketplace, reported today a record number of businesses changing hands in the third quarter of 2017. The full results are included in BizBuySell’s Q3 2017 Insight Report, which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide.
A total of 2,589 closed transactions were reported in the third quarter of 2017, a 24 percent increase from this time last year. This puts the number of year to-date transactions at 7,491, positioning 2017 to be a record-breaking year of small business transactions. It also continues a two-year trend of robust quarter-over-quarter business-for-sale market growth, with Q4 of 2016 being the only outlier. While many factors may be contributing to the active business-for-sale environment, a solid economy, optimism for tax reform and relaxed regulations under President Trump may be encouraging more entrepreneurs to enter small business ownership.
Healthier small businesses are also likely leading to more closed deals. Businesses sold in the third quarter of 2017 boasted a median revenue of $507,865, an 11.2 percent increase from $456,768 in Q3 of 2016.
2017 Q3 Key Financials of Sold Small Businesses
The median cash flow for small businesses listed on BizBuySell jumped 6.9 percent year-over-year from $105,730 in the third quarter 2016 to $113,071 this year. During the same period, the average sales price multiple of cash flow increased from 2.22 to 2.29, while the average multiple of revenue increased 2.8 percent.
2017 Q3 Small Business Sale Price Multiples
“Despite nearly two years of continuous growth, key financials, listings and transactions remain on a positive trend,” said Bob House, president of BizBuySell.com and BizQuest.com. “These conditions along with a strong supply of qualified buyers and sellers, suggests the market will remain active through the end of the year.”
Businesses are Selling Faster
In addition to more business sales, they’re also closing at a faster rate. The median time to sell a business fell 14.6 percent year-over-year from 171 days in Q3 of 2016 to just 146 days. This marks a new low, surpassing the previous low of 154 days in Q4 of 2014. Shorter days on market suggest buyers are confident in today’s small business environment and that buyers and sellers are seeing eye-to-eye on value and getting deals done.
The median asking price of sold businesses increased from 15.7 percent in Q3 of 2016 to $250,000 this quarter. Although the median sale price is also up year-over-year, it’s worth noting that sale prices softened over the last two quarters. At the start of Q1 of 2017, the median sale price was at a multi-year high at $237,000. After dropping to $229,000 during the second quarter, the median sale price fell to $225,000 in Q3. The average asking price ratio slipped a small 1.5 percent from this time last year; however it still remains at a healthy 0.92.
In the pipeline, the number of small business listings active on the market increased 6.7% versus the same time last year. This suggests many sellers are looking to capitalize on today’s market, giving prospective buyers plenty of options. As several BizBuySell studies have surfaced, retiring Baby Boomers continue to account for a high percentage of available inventory. Specifically, Boomers who held strong through the last recession and are now looking to capitalize on higher prices and a strong market before retirement. It will be interesting to see if the recent trend softening of sale prices encourages even more Baby Boomers to list their business rather than risk and uncertain future.
Understanding the Amazon Effect on the Retail Business Sector, and a Surging Services Sector
It is far from breaking news that online retailers, especially e-commerce giants like Amazon, are having an impact on today’s traditional brick-and-mortar stores. In fact, a recentBizBuySell study of small business owners found 65 percent perceive Amazon as a threat. To better understand the true impact of online shopping on traditional retailers, BizBuySell compared the business financials and transaction activity of sold retail businesses to that of restaurants, a sector not has heavily impacted by e-commerce.
In terms of business health, the median revenue of retail businesses sold in Q3 2017 fell 7.1 percent year-over-year, from $573,921 to $533,179. That is in sharp contrast to the restaurant industry, which saw a 22.2 percent increase in the same category. The cash flow of retail businesses also declined, falling 11.2 percent year-over-year, while restaurant cash flow increased 8.7%. Given the opposite direction in which these two sectors are heading, it’s no surprise that the median sale prices of retail businesses declined 12.5% YOY during the 3rd quarter, while the restaurant sector increased 9.1%.
Signaling that retail is down but not out, the number of retail transactions actually jumped 23% in Q3 compared to the same time last year. Perhaps following Warren Buffett’s infamous quote encouraging investors to be greedy when others are fearful, savvy entrepreneurs appear willing to take on online retailers and the retail risk. As one small business owner told BizBuySell, “There is always a better mousetrap. Small business thrives on innovation and ever improving techniques.” While another owner stated “New business concepts are always interesting. As a business person you have to learn to adapt and overcome your business competition.”
Also noteworthy, the number of transactions in the service industry increased by more than 26% in Q3 vs last year. Not only did transactions rise, but the median sale price rose to a record high of $248,000. Growing financials are clearly playing a big part in this activity as median revenue for sold service businesses increased by close to 30% YOY; however it’s fair to wonder if risk adverse entrepreneurs are abandoning their retail dreams for the safety of the service industry. Whereas companies like Amazon provide competition for retailers, new technology driven business models may actually be increasing revenue for those in the service industry. For example, companies like Fitbit and Apple place a large emphasis on health based wearables, which encourage more Americans to work out and likely sign up for gym memberships. Even Amazon and eBay may ultimately help service based businesses such as auto repair shops by providing access to parts and materials at discounted rates. What is definite is that the future of retail and its impact on other industries will be an interesting storyline to follow.
2017 Rest of Year Outlook
Barring any unforeseen events, the last quarter of 2017 should cap a healthy year of small business growth nationally. Newly-listed businesses boast growing median revenues and cash flows, suggesting there’s still a strong supply of healthy businesses available for purchase. An even better indicator, the number of businesses listed for sale continues to rise and is met with strong demand.
While current market activity is promising, business owners and potential buyers would be wise to stay abreast of changing regulations such as tax reform and other factors that could impact small business. Minimum wage continues to be a hot topic and would no doubt have an impact on business costs, while stronger overtime regulations are also on the table. At the same time, recent events such as Hurricane Harvey and Irma could have ramifications on those effected parts of the country. All this combined with new technology and direct to consumer business models make future success no sure thing, but the smart money is still on a continued growth.
“This quarter’s results confirm buyers and sellers are confident about today’s small business market.” said House. “While issues like tax reform remain uncertain, all signs point to continued growth in the business-for-sale market, meaning 2017 is on its way to being a banner year.”
