Fiscal Cliff Sparks a Rush to Sell Small Businesses

green for sale sign
(Photo credit: Diana Parkhouse)
The past few years have been hard on entrepreneurs who were ready to sell their small businesses and move on with their lives. In the post-recession years, many owners struggled to achieve the level of financial performance that makes buyers willing to pay top dollar. As a result, some entrepreneurs have patiently waited for better selling conditions.
But now the tide may be turning for some, according to a recent survey of brokers and M&A advisors by the International Business Brokers Association (IBBA); M&A Source, an organization of intermediaries in middle market deals; and Pepperdine University’‘s Graziado School of Business and Management.
Some business owners, particularly those with businesses valued at $5 million or more,  hurried to sell in 2012 because they were worried about the fiscal cliff and potential tax increases–and found they were in a seller’s market, according to the third-quarter Market Pulse Survey Report.
Baby boomers own half of the businesses in the U.S. and many use the sale of a business to fund their retirement, according to the researchers. Owners of more valuable businesses realized that they would net more by making a deal in 2012.
“Businesses over $5 million in value had more money to lose and were more keenly aware of the large potential tax increases coming in 2013,” Chet Walden, president of M&A Source, said in a news release about the report.
Even owners of some smaller businesses found selling conditions improving. Brokers of smaller, Main Street businesses were less likely to say it was a buyer’s market than in the second quarter, the researchers found. As the size of deals rose, brokers and other advisors were increasingly likely to say it was a seller’s market. For deals of $5 million or above, advisors said it was a seller’s market by a 2:1 ratio, with 41% saying it was a seller’s market, vs. 20% saying it was a buyer’s market.
The IBBA speculated that economic uncertainty led to fewer sellers–resulting in a higher ratio of potential buyers for the businesses that were on the market.
Not all sellers were willing to jump into the market. Among respondents to the survey, 57% thought fewer sellers would put their businesses on the market until they had more clarity on the future. Only 26% thought more sellers would try to make a deal before new taxes take effect.
John Paglia, Ph.D, director of the Pepperdine Private Capital Markets Project and associate professor of finance at the Gradiazo School, said that among businesses waiting to sell, many may be looking to log another year of sales. “Most sellers had poor financial performance in 2009 and moving past that may make their businesses more sellable,” he said in the news release. “They’re hopeful that better numbers will net them a little better value–even with the tax implications in consideration.”
One interesting finding of the survey was that more buyers were coming to the table with cash. In the second quarter, cash at close made up 50% of  financing for deals across industries. But that percentage jumped to 75% by the third quarter.
Seventy–five percent of the buyers of Main Street businesses were individuals. And 60% were first-time buyers. Typically, they were people based in a 20-mile radius of a business, until the deal size got to $5 million and private equity firms swooped in.
I’m curious about why individuals are now willing to sink such substantial amounts of cash into a Main Street business right now. Is it because bank and seller financing is hard to come by–and the only way for them to buy a business is to pay cash? Are they looking at buying a business as an alternative to investment vehicles that are generating poor returns? Or is buying a business a way to ensure that they have work in a lackluster employment market that is taking years to improve? Understanding what’s motivating today’s buyers may be helpful to other owners who hope to cash out in 2013–but don’t have large enough businesses to attract private equity firms.
For full story:
http://blogs.forbes.com/elainepofeldt/