Small Business Sales Slow in Third Quarter – BizBuySell Insight Report
The latest BizBuySell Insight report shows that after five consecutive quarters of year-over-year growth, small business sales activity has slowed. The number of closed deals reported in the third quarter of 2022 fell 2% from a year ago to 2,237.
The third quarter of 2022 was also 4.5% lower than the second quarter of 2022. Small business asking prices fell 13% from a year ago, while selling prices fell 14% .
The small business market is affected by rising interest rates and acquisition costs
According to the report, the decline was the result of sellers cutting prices to accommodate buyers facing rising interest rates and higher acquisition costs. Due to the particularly high rise in interest rates, it is increasingly difficult for owners to find new capital to cover costs and maintain liquidity. With the pressure of rising costs, many find themselves in the position of paying higher rates to cover their debts, putting further pressure on profitability.
“Transaction costs are rising due to higher interest rates and fees associated with obtaining a small business loan. Buyers factor this increased cost into their decision making and bidding because they expect a certain return on investment for their capital, time and risk,” said Dustin Zeher, owner of Horizon Business Brokers.
That sent small business owner confidence plummeting to 46, from 57 in 2021, according to the Business For Sale Confidence Index. The decline is approaching the 2020 record of 45 at the height of the pandemic, before which the index had not fallen below 52.
The decline in homeowner confidence stems from feelings about inflation and rising interest rates. No less than 83% say they are facing higher costs, with 79% saying inflation is not going down. Additionally, more than half of business owners (58%) say the job market isn’t improving, while many (42%) say supply chain issues aren’t improving either. more.
Demand for catering businesses has rebounded, especially in high-traffic locations, as people have started eating out again. The restaurants sold at a median price of $209,500, but 30% below the median sale price of all transactions in the third quarter. Retail businesses sold at a median price of $275,000, down 7% from the previous quarter. While companies in services despite improving by 3% over the previous year, fell by 3% compared to the previous quarter. The median sale price for the services business was flat at $299,000, with sellers asking 14% less than in the second quarter and 13% less than the same period in 2021.
Time of purchase
Due to the economic downturn, 37% of buyers believe they would have been better off buying a business last year. With rising interest rates and the high cost of acquisitions, 41% believe it can be difficult to make a purchase. Business valuation is also a concern, with 42% giving owners unrealistic prices the main driver of less acceptable prices.
Almost half (48%) think they’d get a better deal if they waited a year. Like the housing market, buyers face the conundrum of waiting for a better sale price or paying the extra costs associated with higher interest rates.
Retail sales were visibly impacted, with completed deals down 22% from the prior quarter and 10% year-over-year. Additionally, retail businesses reported a 21% drop in median revenue and a 6% drop in cash flow in Q3 compared to Q2.
Despite the slowdown, some industries saw steady demand. For example, the number of restaurants sold increased by 14% compared to last year. While service business sales grew a modest 4%. Additionally, the median number of days companies spent in the market fell to 169 days from 170 days in Q2 and 181 days in Q1 2022.
Despite the grim trends, the report advises business owners to keep a close eye on growth opportunities while managing risk. He argues that risk has long been expected to drive a wave of baby boomer sellers into the market. Although early forecasts point to a slowdown in the market, there are still chances of recovery. Almost half (48%) of the owners surveyed are selling due to retirement, opening up the possibility for more businesses to sell.
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