2019 Sales of Small Businesses Look Back: Uncertainty Creates Opportunity and Risk – Part 1

We show you the real numbers

Annual Insight Report shows that while small business sales still remain at historically high levels, 2019 transactions took a five percent dip from record-setting 2018 levels.

The number of small businesses that changed hands in 2019 dropped slightly compared to last year according to the latest BizBuySell Insight Report, a nationally-recognized economic indicator which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide. The Insights Report also touches on several compelling demographic trends, including the Baby Boomer’s growing likelihood of selling their businesses as they age and seek retirement, as well as the causes of current market conditions.

In total, 9,746 closed sales were reported by brokers in 2019, a 5.5 percent decrease from the 10,312 deals reported in 2018, which set the BizBuySell record for most transactions. While full-year activity slowed compared to 2018, 4th quarter transactions bounced back to positive growth and it’s important to remember that levels remain historically high.

Still, there are many issues surrounding the market that could cause hesitation when considering a sale, particularly for owners who are having to juggle the dynamic of running a business at the same time of managing through policy changes. In fact, business owner confidence dropped 6 points in 2019 according to BizBuySell’s Annual Confidence Index, largely due to political and economic uncertainty.2019 Q4 Closed Small Business Transactions

“By analyzing BizBuySell’s proprietary data, we continue to witness a bifurcated landscape where consumer confidence holds at historic highs while small business confidence has experienced a softening due to heightened uncertainty,” said Abby Corbett, Managing Director and Senior Economist for CoStar Group.

The most notable driver of uncertainty stems from international tariffs; their uncertain duration and impact on profit makes business valuation more difficult.

“The steel tariffs with China have increased my parts cost an average of 35%,” said Richard Williams, owner of Franklin Transmission and Auto Care in Massachusetts. “This is reflective in my bottom line and it’s not like I can raise prices by 35%. It would cause me to go out of business.”

While tariffs may have been the headliner of 2019, minimum wage increases may be taking center stage in 2020, as 24 states increased their local minimum on January 1 st. According to a December survey of small business owners, rising minimum wage is the second largest concern facing small business, trailing only fear of recession.

Al Meyer of Toppings, a pizza restaurant in Maine, called minimum wage increases “a foolish move by bureaucrats who don’t even own a small business.” He added, “It’s killing us out here, so we raise prices to cover the added expense.”

Increasing base wages also creates an additional challenge in managing the salaries of veteran employees, as pointed out by Brian Armstrong, owner of Havin Fun Inc. in Arkansas.

“I pay above minimum wages, but when they raise minimum wage, the unskilled start making the same as the skilled,” said Armstrong. “It kills morale and eventually we have to raise their wages too.”

John Inzilla of Yo Factor Frozen Yogurt & Ice Cream in New Jersey pinpointed a concern where the term “wage” should factor in the work experience benefit and not focus solely on money, specifically for minors with little to no work experience.

“Minimum wage increases for minors under 18 are specifically an issue for small businesses,” said Inzilla. “We are providing young employees who enter the job market as a minor with experience, skills and education while providing what should be a true ‘minimum’ or ‘training’ wage.” Inzilla describes this trade off as a win-win, adding “The lower rate allows us to operate. Once the minor gains experience, his/her rate will go up naturally or they will qualify for something outside of a minimum wage job. The way it is working now is not beneficial to small businesses.”

Also at the forefront of business owners’ minds is the 2020 presidential election, in which the outcome is likely to impact all small business owners. Some owners, such as retirement seeking Baby Boomers, have little incentive to delay selling and risk another economic recession.

“The topic of a potential economic downturn is coming up more and more in my conversations with sellers”, said Randy Hendershot, Co-founder of Evolution Advisors. “Many of them have weathered the 2008 recession and are looking to sell before the next down cycle.”

For owners matching the characteristics described by Hendershot, the uncertainty associated with the election is likely enough to make them act now. Others, who are focusing on the strong economy, are in less of a rush to sell and may wait it out.

“There is much speculation regarding our upcoming elections and so much division in our country at this moment,” said Chuck Bluemel, owner of Cart Connection in California. “I feel strongly people are holding back until these elections are over.”

What is certain is that 2019 small business financial performance thrived. The median revenue and cash flow of businesses sold in 2019 reached all-time highs, up seven percent and two percent respectively. At the same time, sale prices remained mostly flat, which would seem to favor a buyers’ market. This is supported by the 6 point increase in 2019 buyer confidence , rising while owner confidence has dipped.

However, taking a deeper look, the deals are more balanced than they appear. Sellers are sacrificing value to avoid an uncertain future – and at prices much higher than past years – while buyers take on increased value and risk. The result is very positive for both parties and represents a rare, terrific opportunity to exit or enter the market.

“Despite uncertainty, the health of both the consumer and small businesses remains strong, and spending and hiring trends remain high,” said Corbett. “Both dynamics have contributed to the strength we’ve seen across all commercial real estate sectors.”

Bob House, President of BizBuySell and BizQuest, added “While there is definitely some uncertainty in the market, it’s good to see that 2019 transactions remained strong overall. Buyers and sellers are obviously still seeing value in today’s business-for-sale market and that momentum will likely continue well into 2020, even if levels plateau a bit due to economic and political concerns.”

2019 Small Business Financial Health

While transactions dipped slightly in 2019, the financial health of sold businesses increased. The median revenue of a sold business in 2019 was $567,000, up seven percent from 2018’s 531,653. Median cash flow also increased, up two percent from 2018 and reaching $122,506 overall.

These financials represent the highest annual revenue and cash flow since BizBuySell started measuring this data in 2007. While 2018 set the record for most transactions, 2019 has been characterized as having the most financially strong business transactions. 2019 Q4 Key Financials of Sold Small Businesses

2019 Small Business Values

The median sale price of a business sold in 2019 increased just $1,000 to $250,000 compared to 2018, while the asking price remained flat at $275,000. That values did not change despite a year of record financial performance says more about economic conditions and risk tolerance than the state of businesses themselves.

Tariffs weighed on the bottom line of many businesses and threats such as minimum wage are expected to do the same in 2020. The market seems to have settled on a position where owners are providing a discount to compensate for risk, while still being rewarded with historically high prices. As a result, buyers are taking hold of high performing businesses with the associated risk. Opportunistic buyers with a strategy to increase efficiencies and offset rising costs are the most likely to benefit in this situation.

2019 Q4 Small Business Sale Price vs. Asking Price

2019 Industry Breakdown

Retail businesses saw the most financial growth, showing there is still plenty of opportunity for small retailers despite big box and online competition. The median revenue of a retail business grew 11.1 percent in 2019, reaching $600,000. Similarly, the median cash flow increased 8 percent to $108,000. Restaurants also helped pace the strong 2019 financials while experiencing more than 3 percent growth in both median revenue and cash flow.

Retail sector improvements helped offset significant drops in manufacturing performance. The median revenue of a manufacturing business in 2019 dropped almost 20 percent to $917,000 while the cash flow decreased almost 13 percent, falling to $240,000. With tariffs playing such a significant role in 2019’s business economy, it’s not surprising that manufacturers would be the most hurt over the course of the year.

“In addition to higher-level trends, the BizBuySell industry-level insights illuminate the prevailing resiliency of retail businesses, which arises an increasingly hot topic among CRE participants,” said Corbett. “With revenue of retail businesses growing fastest among industry groups, this confirms our view that the retail sector is far from fading. Rather, it stands to flourish amid strong consumer-based dynamics even in the face of an increasingly complex atmosphere. The tight labor market and resulting strong consumer spending are continuing to push both traditional retail, as well as food and beverage sales higher, which has been a tailwind for profitability growth for many smaller retailers.”

2019 Q4 Small Business Sales by Sector