Is the time right to sell my business
As the economy continues to grow and strengthen, so does the number of businesses sold including their selling price. All this is according to the Q3 2018 Insight Report from BizBuySell.
Potential challenges selling a business
However, is this all about to change?
Headwinds are starting to be talked about with potential to hurt the US and global economies. The headwinds include:
- Rising US interest rates which will increase the costs of debt servicing for business buyers.
- Tariffs and the tariff wars according to the IMF are now starting to affect the global economy. According to the Insight Report, 30 per cent of business owners said they were being negatively impacted by the tariffs.
- Some of the countries caught in the tariff wars can target specific sectors of the economy. If you own a business in one of those sectors it can create significant hardship.
- Next month are the US midterm elections. If the Democrats are successful at the polls they will have the ability to change or stall the agenda of President Trump.
- The tremendous growth of the marijuana industry in some states in the US is changing the land and commercial real estate use in different geographies. Many states are still deciding their position on medical and recreational marijuana but other states like California, Washington and Colorado are now going all in as the tax revenue is too attractive. This is therefore putting rental rates and other cost pressures in different communities.
- Minimum wages are increasing and increasing substantially in some States. Amazon has forced the issue by declaring to pay a $15 minimum wage.
Highlights from the Q3 Insight Report
Here are some of the highlights from the Q3 2018 Insight Report.
- The median price from the sale of small businesses sold was $249,000 which is up 10.7 percent from the same time last year and the highest amount since BizBuySell started collecting data in 2007.
- The median asking price grew 7.6 percent to $269,000 which translates to a 93 percent sales-to-ask ratio, up slightly from the 92 percent reported in Q3 2017.
- The strong sales-to-ask ratio likely means that buyers and sellers are seeing eye-to-eye in terms of value. While owners are getting top dollar for their business, buyers are inheriting businesses with a better financial footing. Primarily fueled by a healthy economy, businesses sold in Q3 had $530,995 median revenue and $116,229 median cash flow. Those financial totals are up 7.4 percent and 2.8 percent respectively year-over-year.
Charts from the Q3 2018 Insight Report.
Below is a total of 5 different charts that look at data points including the financial performance of businesses based on gross revenue and cashflow or Sellers Discretionary Earnings.
Sale price Vs Asking price
As the chart below shows, both the median asking price versus sale or sold price is increasing just a little. This reflects the strengthening economy. What’s interesting is the relatively steady increase in median sale price and median asking price. A lot of business owners believe that as the economy improves so will the amount they can sell their business. However, if you consider inflation and waiting several years to sell the business in the hope the price is higher, its better to sell sooner than later and have a solid investment plan for that money; plus, it saves a lot of stress and struggle that comes with owning and operating a business.
Gross Revenue Vs SDE
This chart shows the relationship between median gross revenue of a business and what the owner gets to keep or as the graph shows, median cashflow. A better name is Sellers Discretionary Earnings or SDE. SDE represents what the owner of the business gets to keep after all expense which is critical to a buyer. The SDE is typically the raw number a buyer considers when comparing one business against another business to buy.
As the graph below shows, SDE is steady and not growing when compared to the Q3 in 2015 to the Q3 in 2018.
Closed or sold businesses by quarter
This is an interesting chart as it shows the number of closed or sold businesses by quarter. What’s interesting is the nice jump in closed small business from Q1 2017 to now.
Sale price multiples
This chart is like the Sales Price Versus Asking Price chart above. As the chart below shows, both the Average Sale Price as a multiple of Cash flow and the Average Sale Price as a multiple of Revenue is VERY flat. Once again, a lot of business owners believe that as the economy improves so will the amount they can sell their business. However, as the data shows this is not correct. Additionally, it’s important to know the multiples for your industry and the primary reason I do a valuation before selling a business.
Sales by industry sector or type
This chart provides a very simple breakdown of businesses sold by industry sector. An important data point I share with all business owners is that it takes about 8 months to sell a business but only about 25% of small businesses ever sell.
Median days a business is on the market
This too is a simple chart and shows the median days on the market before a business sells. At Q3 in 2018 it is moving to just under 180 days or 6 months. In Q1 2016 it was as high as just under 190 days while in Q3 in 2017 it was as low as 146 days.
Are you thinking of selling your business?
If you own a business and are thinking of selling its tempting to look at the data in this report to help guide your decision. No question, data is good.
What is critical to remember when selling a business is that it doesn’t happen quickly. The average time it takes to sell a small business is approximately 8 months but its critical to remember that only about 25 per cent of businesses actually sell. The other businesses don’t sell because of many different factors including major changes to the industry the business is in, for example, retail and medical. The sellers have left their decision to sell too long and the business is declining which worries potential buyers as they are not sure where the bottom is for the business and what they are buying. Other factors include inaccurate or poor financial statement or presenting the business very poorly to potential buyers.
If you are ready to sell your business, the first steps are to get a business valuation. The steps I take to prepare a business valuation are to not only assist the seller with what their business is worth in their industry but also look at it from a buyer’s perspective that needs to get a loan to help finance the purchase of the business. If you’d like to know more, click this link to see a Sample Business Valuation.
Do you have questions about selling your business?
If you have questions about selling your business give me a call on (916) 570-2674 or send me an email.