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 dropped by 2% from last year reaching 2,237.
The third quarter of 2022 was also 4.5% lower than the second quarter of 2022. Asking prices for small businesses dropped by 13% from last year while sale prices dropped by 14%.
Small Business Sale Market Hit by Rising Interest Rates and Acquisition Costs
According to the report, the decline is a result of sellers cutting prices to accommodate buyers facing rising interest rates and higher acquisition costs. Particularly rising interest rates are making it increasingly difficult for owners to source new capital to cover costs and maintain cash flow. With the pressure of rising costs, many are left in the position of paying higher rates to cover debts, putting further strain on profitability.
“Transaction costs are increasing due to higher interest rates and the fees associated with obtaining a small business loan. Buyers are calculating that increased cost into their decision-making and offer as they expect a certain ROI for their capital, time, and risk”, said Dustin Zeher, owner of Horizon Business Brokers.
This prompted confidence among small business owners to drop to 46, down from 57 in 2021, according to the Business for Sale Confidence Index. The drop comes closer to 2020’s record of 45 during the peak of the pandemic, prior to that, the index hadn’t dropped below 52.
The drop in owners’ confidence stems from sentiments over inflation and rising interest rates. A whopping 83% say that they are experiencing higher costs, with 79% saying inflation is not easing. In addition, more than half of business owners (58%) say the labor market is not improving while many (42%) say supply chain issues are not improving either.
Demand for restaurant businesses has bounced back, particularly in high-trafficked locations as people started dining out again. Restaurants sold for a median price of $209,500, but 30% below the median sale price of all Q3 transactions. Retail businesses were sold for a median price of $275,000- 7% less than the previous quarter. While businesses in services despite improving by 3% over the previous year, fell by 3% from the previous quarter. The service business median sale price remained flat at $299,000, with sellers asking 14% less than in Q2 and 13% less than the same time in 2021.
Timing of a Purchase
Because of the economic downturn, 37% of buyers feel they would have been better off purchasing a business last year. With rising interest rates and the high cost of acquisitions, 41% feel it may be difficult to make a purchase. Business valuation is also a concern, with 42% attributing owners setting unrealistic prices as the top factor to less acceptable prices.
Almost half (48%) believe they would get a better deal if they waited a year. Similar to the housing market, buyers are in a conundrum of waiting for a better sale price or paying the additional costs associated with higher interest rates.
Sales in retail businesses were visibly affected with closed transactions down 22% over the previous quarter and down 10% year-over-year. In addition, retail businesses reported a 21% drop in median revenue and a 6% decrease in cash flow in Q3 compared to Q2.
Despite slowing down some industries did see some steady demand. For example, the number of restaurants sold grew by 14% from last year. While sales of service businesses grew by a modest 4%. Furthermore, the median days on businesses on the market dropped to 169 days, from 170 days in Q2 and 181 days in Q1 of 2022.
Despite the gloomy trends, the report advises business owners to keep a close eye out for growth opportunities while also managing risk. It argues that the risk has long been expected to drive a wave of Baby Boomer sellers into the market. While initial forecasts indicate the marketplace slowing there are still chances of recovery. According to surveyed owners, almost half (48%) are selling due to retirement opening up the potential for more businesses up for sale.
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The Fed is determined to slow down the economy and this is just one more place where the high interest rates will continue to cause the “pain” they want.