Sale of small businesses in 2019 dips five percent
Andrew Rogerson
in Business valuations, Sell a Medical Practice, Selling your business
BizBuySell.com is one of the websites that allows the advertising of the sale of small businesses. It is one of the many websites I use to find a qualified and motivated buyer of a business.
The location of these businesses being advertised for sale are anywhere in the United States.
Each quarter BizBuySell.com prepare a very useful Insight Report. This report captures some of the primary statistics about what’s happening with the sale of small businesses in the United States.
Here is a snapshot of what was happening with the sale of small businesses during 2019.
Closed sales for 2018 compared to 2019
- If you would like to look for the good news, the number of businesses that sold in the 4th quarter of 2019 was higher than 2018. That is, for the 4th quarter of 2019 the number of sold businesses was 2,340. In 2018 for the 4th quarter the number of sold businesses was 2,288.
- The rest of the news for businesses that sold in 2019 compared to 2018 were not good news. On an annual basis, for 2019 the number of businesses to sell was 9,736. For 2018 the number was 10,312. This represents a drop of about 5%.
- The number of businesses that sold for the first, second and third quarters of 2019 were 2,504, 2,444 and 2,454 respectively. All these quarters were lower than the corresponding period in 2018. Sales for the first, second and third quarter were 2,678, 2,705 and 2,685 respectively.
One of the intriguing things to remember is that only about 25 per cent of small businesses ever sell. The owners of these businesses that therefore sold will be delighted to close the sale of their business so they can move to the next chapter of their life.
The chart below breaks down the sale of small businesses on a quarterly basis from the fourth quarter of 2016 to the fourth quarter of 2018.
Revenue Versus Cashflow of sold businesses in 2019
One of the first questions from small business owners is – What’s the value of my business?
This question never comes with a quick five-minute answer. There are way too many variables to consider. However, because we are all so busy the temptation is to look for quick data points. One of the most common and most inaccurate data points is valuing a business based on the gross revenue of the business.
Many times a business owner sees as significant the gross revenue of their business. For example, if the gross revenue is $1,000,000 then a reasonable multiple to value their small business is 5 or 6- or 7-times (pick your number) gross revenue. This approach is simply wrong.
Gross revenue multiples are used on companies publicly trading on the Stock Exchange. As a result, a publicly traded company may have gross revenue of $500,000 up to billions of dollars. In simple terms, this business has a large share of the market. Small businesses simply do not own a large share of the market and are constantly fighting to keep and earn market share or increase their gross revenue.
To illustrate my point, if your small business was generating $7 million in gross revenue and costs $8 million per year to operate, how much are you willing to pay to buy a business that is losing $1 million per year?
The more important metric to review is the Median cashflow of a small business. That is, Median cashflow is how much is left over after taking the Gross Revenue and deducting the Expenses to run the business.
The chart below shows the median revenue of sold businesses in 2019 was $567,000 or up 7 per cent from 2018. The Median Cashflow was also up but only 2 per cent to $122,506.
How do I know the value of my business?
Be careful applying these numbers to arrive at a value for your small business. It can be misleading. To explain in much more detail, please visit this page of my website to learn more about the steps to value your business.
Sale Price Versus Asking Price in 2019
Whether we like it or not, its part of the culture to negotiate the purchase price of a small business. If you are buying shares of a company that is on a public exchange the price is the price.
For small businesses that sold during 2019, here are the statistics.
The median Sale Price of a business that sold in 2019 saw an increase of just over $1,000 the previous 12-months and went up to $250,000. The Asking Price for the businesses that sold in 2019 did not change and was $275,000. The simple math tells us that a business owner selling their business should expect a buyer to offer about 10 per cent. Each business sold will have its own number, but this provides a yard stick to consider.
The chart below shows the Small Business Asking Price Versus the Sold Price broken down for each quarter starting in the fourth quarter of 2016 to the fourth quarter of 2019.
Key Metrics by Sales Price for 2019
Here are some more Key Metrics to consider if you are planning to value and sell your business in 2020.
Again, your business is unique. Do not look for a ‘one size fits’ all scenario.
Some of the reasons your business is unique includes:
- How long the business has been operating. This includes the length of time of ownership of the current owner. If an owner wants to sell after owning the business about two years, that will concern a buyer as it suggests instability.
- The quality of the financial statements of the business. The number one reason a business buyer walks away is because they are not confident in the quality of the financial statements.
- The performance of the business when comparing it to other businesses in the same industry. The IRS collects data as do other companies. The data comes from assigning a NAICS code to it. There are approximately 20 primary two-digit NAICS codes that break down to 96 subcategories and 317 industry groups. When valuing a business, it is critical to get a set of data points that are as close to the NAICS code of that business as possible. After all, it makes no sense to compare the performance of a Residential HVAC business to a Pediatric practice or Landscaping business etc.
- The total number of employees to help run the business, their skillset, training and compensation.
- If the business operates from real estate, does the business owner lease or own the real estate.
- The amount of direct and indirect competition.
- Changes a new owner will need to make for the business to be successful.
- What is happening in your industry with government regulation, changes in technology and the local economy that your business operates from.
- The condition of the fixtures, furniture and equipment that transfers to the buyer.
- Does the business require any federal or state licenses and if so, are these transferable to the buyer.
- The strengths and weaknesses of the business in areas such as marketing, operations, number of key customers, customer concentration, use of technology and many other variables.
The value of a business
The value of a business does matter. If a business value is greater than $1,000,000 it will probably attract more buyers but take longer to close escrow as well as other metrics. These variables as well as those above and more will show up in the following metrics.
- The Median Days on Market.
- For 2019 and businesses that sold and the Asking Price was less than $1 million the Median Days on Market were 183 versus 198 days if the Asking Price was greater than $1 million.
- The Average Cash Flow Multiple
- For 2019 and businesses that sold and the Asking Price was less than $1 million the Average Cashflow Multiple was 2.33 versus 3.66 if the Asking Price was greater than $1 million.
- The Average Revenue Multiple
- For 2019 and businesses that sold and the Asking Price was less than $1 million the Average Revenue Multiple was .59 versus .90 if the Asking Price was greater than $1 million.
- The Average Sales to Asking Price
- For 2019 and businesses that sold and the Asking Price was less than $1 million the Average Sales to Asking Price was .91 versus .93 if the Asking Price was greater than $1 million.
The chart below shows the above Key Metrics for businesses that sold in 2019. The numbers in blue are for all Sold Businesses while the numbers in orange are for Sold Businesses with an Asking Price greater than $1,000,000.
Are you looking to value and sell your business in 2020?
There are many steps to value and sell your business in 2020.
If you would like to know the value of your business, please let me help you. Simply complete a request for me to contact you and we can have a chat. After we talk and it is what you want to do, I’ll then send an email with the documents I need to value your business.
Click this link if you would like to see a sample business valuation.
If you are ready to sell your business but are not sure where to start, the following will help.
This link to a document on my website provides a one page summary of the many steps to sell a business.
For more information, this page on my website explains what to expect when selling a business. It also includes links to other free documents and free information.
If you have questions about the value of your business or the steps it takes to sell a business, send me an email to info@rogersonbusinesservices.com or give me a call on (916) 570-2674.
