Business-for-Sale Indicators Improving: Report

The increased business-for-sale market activity came at the expense of a decline in business valuations.

The nation's business brokers closed more business-for-sale transactions in 2010 than in 2009, according to data released by online business marketplace BizBuySell. According to the company's Insight Report, the number of closed business-for-sale transactions in the United States, as reported by business brokers, rose by 3 percent in 2010.
The increased business-for-sale market activity came at the expense of a decline in business valuations. The median closed-transaction sale price for 2010 dropped 6.3 percent year over year, from $160,000 in 2009 to $150,000 in 2010. Key metrics used to value companies also fell slightly in 2010, with the average revenue multiple falling 2.1 percent and the average cash flow multiple falling 0.6 percent.
"Spurred on by a strong showing in the fourth quarter, the business-for-sale market showed some promising signs of recovery heading into the new year," said Mike Handelsman, group general manager for BizBuySell and BizQuest. "In 2010, we saw more deals getting done. One of the key drivers for that growth was that business sellers were more realistic about their business valuations."
According to Handelsman, declining business valuations suggest continued softness in the economy and constrained capital access, reducing the number of qualified buyers. "While access to financing for business acquisitions began to loosen up in the second half of 2010, it remains difficult for many business buyers to get the financing necessary to purchase a company," Handelsman said.
The report found with financing sources still in short supply, the growth in acquisition activity in 2010 was powered largely by a growing number of smaller business-for-sale transactions in non-manufacturing industry sectors. Transactions completed in the fourth quarter were up 11 percent versus the fourth quarter of 2009.
"It appears likely that uncertainty regarding tax code changes may have also contributed to increased sales activity in the fourth quarter," the report noted. "Seller concern regarding the potential expiration of lower tax rates and the corresponding decrease in the business owner's after-tax proceeds from the sale of a business could have spurred sales."
While many business owners have hesitated to sell their businesses in the midst of a recession and flat/declining business performance, the recovering economy should reverse this trend and drive an increase in the number of businesses listed for sale. A compounding factor is that the earliest members of the U.S. baby boomer population, many of whom are business owners, have reached retirement age. As an increasing number of small business owners near retirement, this trend will continue to bring an above average number of small businesses to the sale market, the report continued.
Easing credit flow is also predicted to have a positive effect on the business-for-sale marketplace, according to the company, which noted that the federal government and the Small Business Administration have recently focused on helping banks ease their lending restrictions to provide necessary capital to the small business market. "As capital becomes more readily available, it will be easier for brokers and business owners to close sales. It's very simple," said Handelsman. "When credit is more readily available, the wheels of business succession will start to turn again. Until then, we can expect a moderate recovery in the business-for-sale marketplace."