Blog

Never miss an update! Subscribe to our blog.

Sales of small firms heat up as revenues fall-Veterans Take Note

Posted by Michael Horn on Sun, Oct 26, 2014 @ 02:27 PM

Here is another great article by Urvaksh Karkaria of the Atlanta Business Chronicle. This article is representative of many metropolitan areas. The teaching point is that as the market improves you see business selling prices increase. As we have discussed in class and in other articles, buying a business is one way for a veteran entrepreneur to start out. There are many successful businesses for sale. This option should be considered. It is a viable option when you separate from the service and relocate. The important thing is to ensure that you perform your due diligence.

Karkaria writes----Metro Atlanta's small business transaction market is heating up as selling prices surge amidst growing confidence in the economy.

The median selling price of small businesses sold in metro Atlanta rose 15 percent in the third quarter, compared with a year ago, according to new data from online business-for-sale marketplace BizBuySell.com. The median revenue of those businesses, however, dipped 4 percent from a year ago.

According to an analysis of 41 closed transactions in metro Atlanta by BizBuySell, businesses sold for a median price of $242,500 in the third quarter, compared with $210,000 a year ago. The businesses that sold in Q3 had a median annual revenue of $556,051.

The price the buyer paid as a multiple of the company's revenue in the Atlanta market tumbled nearly 31 percent in the third quarter versus a year ago. The cash flow multiple, meanwhile, dipped 4 percent, year-over-year.

Across the United States, brokers reported 1,987 closed deals to BizBuySell in the third quarter, representing a 17.9 percent increase from last year and the highest number of small business sales recorded in a third quarter since BizBuySell began tracking data in 2007. The median sale price for businesses sold in the third quarter rose 5 percent compared to last year, increasing from $180,000 to $189,000.

Activity in the business transaction market is fueled by a strengthening economy and demographic trends, said Bob House, group general manager of BizBuySell.com and BizQuest.com.

Baby-boomer business owners are retiring — increasing the supply of businesses. On the demand side, buyers are seeing greater purchasing power as stock market portfolios and home values increase, House said.

A strengthening economy is also boosting business fundamentals, making them attractive to buyers. Sellers are feeling more confident that they can exit their business successfully in today's market, suggesting a shift from the buyer-friendly market seen in recent years, according to a BizBuy survey of more than 1,500 buyer and sellers.

More than 21 percent of sellers said they were "very confident" they could sell their business at an acceptable price, a 20 percent increase from 2013 when 17.6 percent felt the same. Nearly half (44 percent) of those owners credited improving business fundamentals as the primary reason for their increased confidence.

Increased seller confidence is driving prices higher — in Atlanta and nationwide. Sixty-two percent of buyers surveyed felt small businesses are currently overvalued. Thirty-four percent of sellers agreed — an 18 percent increase from the 29 percent of sellers who believed businesses were overvalued a year ago.

While business owners are gaining more confidence in their ability to sell their businesses for a reasonable price, acquisition financing remains an issue, according to David Chambless, CEO of business broker Abraxas Business Services Inc.

"SBA lending is strong, but commercial lending has not yet stepped up to acquisition financing for smaller businesses (those with revenues under $10 million)," Chambless said.

The number of businesses sold in the third quarter at Atlanta-based business broker Walden Businesses Inc. was up 12 percent from a year ago, President Sara Burden said. Profitability of the for-sale companies, meanwhile, was also up over third-quarter 2013.

The values on the businesses stayed strong with the sellers achieving very close to their asking prices, Burden said. That could be attributed to strategic buyers, such as private equity firms with similar portfolio companies in their holdings.

"If a business is priced fairly, the strategic (buyers) generally do not have value issues because they gain from economies of scale in purchasing power, back office savings, space/lease savings, cross-selling opportunities, etc.," Burden said.

The business transaction market's robustness can be attributed to pent-up demand in metro Atlanta. Companies are responding to the needs of their customer base, Burden said.

"With healthier financial statements, sellers are able to command stronger prices," she said. "Buyers are more willing to pay those prices if they believe the revenues and profitability are sustainable."

Burden is optimistic the small business transaction market will remain strong for the rest of the year.

"It's no secret that the population is aging and many of our owners are well beyond retirement age," Burden said. "This situation is providing us with sellable inventory to meet buyer demands."

Most indices that are denominated by confidence will "solidly improve" over the rest of the year, Chambless said.

"Economies (micro and macro) will continue to strengthen making buyers more confident about buying, and increases in interest rates will provide investment vehicles for the sellers of businesses," he said.

The local optimism is echoed in the BizBuySell survey. Overall, 63 percent of sellers expressed general confidence, saying they were at least somewhat confident they would receive an acceptable price this year. Meanwhile, 47 percent of sellers said they were more confident they could receive a better price in 2014 than in 2013 compared to 34 percent who said their confidence level was either lower or the same as last year.

Topics: Veteran, Entrepreneurs, Resources, Vets, Entrepreneurship, Small Business, Buying, startups