BizBuySell.com, the Internet's largest marketplace for buying or selling a small business, recently released economic data for the second quarter of 2009.
Their 2Q 2009 business-for-sale data suggests small business-for-sale transactions and valuations have continued to decline as a result of the struggling economy.
According to BizBuySell.com, limited access to capital is resulting in lower business valuations and fewer deals getting done. Buyers are reluctant to pay the asking price for a business simply out of fear for the business's ability to survive current market conditions.
The number of closed transactions reported to the site in the second quarter of this year decreased by more than 50% versus the same time period in 2008, representing the largest year-over-year decrease shown in the data to date. Closed transactions are reported to BizBuySell.com by business brokers nationwide.
"These numbers are not surprising as the economy continues to deter the consummation of business transactions at all levels," says Mike Handelsman, General Manager of BizBuySell.com. "There is no doubt that a large number of business transactions are not being closed simply due to the lack of available buyer capital and bank financing.
Popular Business Valuation Metrics Are Down
In addition to fewer completed deals, BizBuySell.com notes a decline in the metrics that are used to value companies. Compared to the same quarter in 2008, both revenue multiples and cash flow multiples have declined.
Revenue multiples on reported closed transactions dropped 2.5% to .68 in the second quarter of 2009. Similarly, cash flow multiples dropped to 2.59, representing an 8% decrease. The revenue and cash flow multiples are calculated by dividing the selling price of the business by its reported annual revenue or cash flow.
The median sales price for closed transactions also declined year-over-year, from $200,000 to $160,000 - a 20% decrease.
"Now more than ever buyers are being cautious about entering into business transactions," says Handelsman. "Many buyers are reluctant to pay the asking price for a business simply out of fear for the business's ability to survive current market conditions."
"While there are more potential buyers in the market due to high unemployment levels, they don't have the capital or the risk-profile they've had during better times", he added "To make matters worse, banks just aren't willing to back business purchase transactions to the same level that they have in the past."
Key Takeaways for Business Sellers and Buyers
While current market conditions are preventing many business-for-sale transactions, some deals are still closing successfully. BizBuySell.com suggests that buyers and sellers consider the following attributes of closed transactions that have helped those businesses reach a deal:
- Revenues and Profitability that have Remained Intact - Businesses that have managed to maintain their levels of revenues and profitability throughout the recent downturn are more likely to sell. Buyers are less willing to take a risk during uncertain times, so a track record of stability and success may help in cutting down the perceived risk of completing a transaction.
- Predictable and Steady Cash Flow - One of the most attractive elements for a buyer is knowing the business will make money in the future. Businesses with a more reliable cash flow in today's economy - such as Computer and Software Services or Travel and Transportation Services - are having better luck closing deals.
- Physical Assets for Debt Financing - Current economic conditions have made banks wary of lending. Small businesses with higher levels of tangible assets, such as capital equipment or owned real estate, will fare better in securing a purchase loan. Both buyers and sellers can use the new BizBuySell Small Business Community Network to ask questions and receive valuable insight from business intermediaries and experts.
- Seller Financing - Buyers are facing limited access to SBA-backed loans, as well as depleted savings and retirement accounts that have been hit hard by stock market declines. Because of this lack of access to money, sellers offering to partially finance their business sale is becoming a crucial element to closing a deal. Seller financing could be a deciding factor for some buyers. As such, BizBuySell.com recently introduced a feature to allow sellers to clearly indicate if they offer seller financing when listing their business. Those who have flagged their listings are seeing 50 to 70 percent more activity from interested buyers.
- Strategic Value - Sellers in this market need to make sure they have a focused plan for growth to attract potential buyers. Buyers are more willing to buy when they feel they can increase the value of the business. A plan for acquiring competitors or expanding a current business into a complementary product or service adds more strategic value to a potential buyer. BizBuySell.com offers an online business valuation tool that buyers or sellers can use to find out how valuable their business may look under different growth scenarios.
The BizBuySell.com Second Quarter 2009 Insight Report includes business-for-sale metrics for the total U.S. and for more than 70 major metropolitan areas. Metrics are also available by industry and business type. The current Insight Report comprises data from 1,040 closed transactions and more than 27,150 active listings.
For more information on the BizBuySell.com Insight Report, visit http://www.bizbuysell.com/news/media_insight.html.
If you would like to see local business valuation trends for your area, visit Local Business Valuation Data Q2 2009.