2019 Small Business Market: Uncertainty Creates Opportunity and Risk – Part 2

Presentation - we show you the numbers

This is Part 2 of the Small Business (Sales) Market Place

2019 Top Performing Markets by Sales

Among cities with at least 50 transactions, Richmond, VA saw the biggest increase in activity, with 53 percent more businesses changing hands. Other cities that experienced a notable increase in 2019 transactions include Baltimore (up 44 percent), Detroit and San Antonio (up 25 percent), Dallas (up 24 percent) and Houston (up 23 percent).

The city that saw the biggest drop in activity was Minneapolis, with transactions down 40 percent from last year, while Washington D.C. (down 29 percent), San Jose (down 23 percent), Tampa Bay (down 20 percent) and San Diego (down 20 percent) also experienced notable drops.

Among qualifying markets, Salt Lake City owners earned the most for their business, with the median sale price reaching $450,000. Other high earners included those in San Antonio ($405,000), Minneapolis ($399,450) and Charlotte ($385,000). The cheapest businesses could be found in cities like San Diego ($127,000), Las Vegas ($135,000) and Jacksonville ($136,000).

Editor’s note: Florida in total accounts for more sales then any other State. Ask us Why?

2019 Top 10 Markets by Closed Transactions

2019 Top 10 Markets by Median Sale Price

2019 Differences by Deal Size

While the median sale price of business sold in 2019 was $250,000, more than 1,300 transactions had an asking price of over $1 million. Those businesses tend to take longer to sell, averaging 15 more days on the market than others, but the reward is well worth it. Owners who were able to show such strong business performance earned 93 percent of their asking price and received significant value for their high financials. In fact, these businesses earned a .90 revenue multiple and 3.66 cash flow multiple, both significantly higher than the .59 revenue and 2.35 cash flow multiples received by all businesses. Manufacturing businesses made up the highest percentage of these high earners proving that while tariffs are taking a hit, there is still quite a bit of upside in the manufacturing industry.

2019 Key Metrics Sales Price

Q4 2019 Overview

While 2019 transaction numbers were down in aggregate, Q4 2019 actually outperformed Q4 2018, with 2.3 percent more transactions taking place. Median revenue grew 6.7 percent and median cash flow was up 2.4 percent. The median asking price also increased, up 6.2 percent to $275,000, allowing the median sale price to grow 8.7 percent, to $250,000.

Market Outlook

2019 marks the third straight year of high transaction activity after a noticeable spike from 2016 to 2017. While 2020 is not without questions, we still expect this level of activity to continue, in part due to the ongoing supply created by retiring Baby Boomers. According to a recent BizBuySell survey of business brokers, 75% expect more Baby Boomers to sell their business in 2020 than did in 2019. With current listings showing even higher revenue than at the same time last year, up 2.8% to $534,558, demand is likely to follow as buyers leap at the chance to acquire such strong performing companies.

“This increased supply, coupled with the uncertainty surrounding the trajectory of material and labor costs, should provide an opportunity for savvy buyers to scoop up profitable businesses at a relative discount financed by near record-low rates,” said Corbett. “Preferences will likely be given to companies with lower-leveraged balance sheets that make attractive leveraged buy-out candidates.”

With younger generations stepping up to new ownership opportunities, this shift and potential gain in momentum from new ownership could very-well provide additional runway to this already extended economic expansion. Luke Barfield, owner of Precizion 509 Gymnastics in Colorado, summarizes the situation by saying, “Boomers are selling, markets are growing, smart people are getting into more businesses.”

Terry Tretta of American Realty Brokers echoes Barfield’s sentiment, stating, “As a broker who experienced the last recession, I keep a good pulse on the economy and my outlook is good. Mainly because business buyers are smarter. It really is the same old simple basic – overpriced items do not sell, overpriced businesses usually will not sell.”

Further fueling inventory, concerns over a potential recession will be enough for some owners to put up the for-sale sign. When surveyed, owners listed recession as their number one concern heading into 2020. In addition, 45 percent of owners said they were concerned with the future of the economy and one in four believe a recession will hit before the end of 2020.

“I’ve been a small business owner for 42 years, I’ve seen my share of recessions,” said Mike Medford, owner of Medford Design Build Remodel in Texas. “The scariest thing about them is you never know how deep they are.”

Perhaps a subcomponent of recession concerns is the uncertainty around the election. According to surveyed business owners, 46 percent would like to see the re-election of President Trump. The rest of the field is largely open, with 23 percent of owners undecided on their desired candidate. As the field narrows, both owners and buyers will need to stay informed on proposed legislation for each candidate and decide how their business would be affected in the long and short term.

“The market for profitable small businesses has been good this past year, and the outlook for the economy is quite good, depending on the elections,” said Ron Johnson, former President of the California Association of Business Brokers Association.

Staying close to proposed legislation is especially true for those owners in manufacturing, the industry hit the hardest by policies in 2019. That said, according to Abby Corbett, the manufacturing outlook for 2020 appears to be bright. “Low-financing rates are most beneficial to capital-intensive small businesses and 2020 is expected to be another favorable year for debt capital from both an availability and pricing perspective. Thus, if trade policy headwinds abate in 2020, we would expect to see business sales in the manufacturing industry rebound strongly.”

2020 will be an interesting year in terms of strong transaction activity and headwinds from election and policy concerns. BizBuySell data suggests that buyers and sellers should stay the course, but have a plan ready in case things change. As Frank Guarin, owner of 3Cart Merchants in California puts it, “If a storm is coming, those who are prepared shall prosper.”