Strong Economy – Strong Buy-Sell Market

Record number of small business sales in 2018!

This as per bizbuysell.com. More businesses sold after being advertised on bizbuysell.com than any other year, and 2017 was 25% higher than 2016.

Our first question is: what is “small?” Well, the median revenue of these companies was about $500,000 and the median selling price was about $250,000. Pretty small. What we call micro-businesses. Typically these are companies where the owner is behind the counter and if he or she hired someone to do that work they would go broke.

Second question: is there similar activity with larger companies, small, mid-sized, and lower middle market firms? The answer is yes, based on the activity level of everybody we know in the M&A/buy-sell industry. What we write about is aimed at the $10 million deal and below.

The third, and most important question is: Why? The top four reasons are:

  • Demographics
  • Corporate baloney (and we really don’t mean baloney, but this is a family newsletter)
  • Growth
  • Easy money

Demographics

The driving force is the baby boomer generation is large and highly entrepreneurial (as per an Intuit study saying this generation owns a disproportionate share of businesses. Look at some of the statistics.

  • Wall Street Journal– The greatest transfer of wealth in history will occur in this country over the next decade; an estimated $10 trillion is expected to change hands, and much of this wealth is tied up in family businesses. 70% of medium sized companies will change hands (2008).
  • PriceWaterhouseCoopers– Two-thirds of companies with sales of $5,000,000 to $50,000,000 will change hands in the next 10 years (2011).
  • Magazine– 65-75% of small companies in the US – some 10 million – likely hang up a “for sale” sign in the next 10 years (2015).
  • Axial– 66% of businesses with employees are owned by baby boomers (2015).
  • Barlow research– Two-thirds of lower middle-market business owners are expected to retire. Their average age of retirement is 67. Between 35 & 45% of these owners are 65 or older (2018).

Notice the same predictions from 2008-2015? It’s because we had a little event 10 years ago affectionately called the “Great Recession.” And guess what? Most of those owners planning to sell had to delay it. Sixty percent of them delayed their exit by at least two years, as per a study by Sun Trust Bank. Next, the economy got pretty good starting in 2011 and most of those soon-to-exit owners were now saying, “recession, what recession, this is pretty good (so why would I sell)?”

But life has a way of catching up with us. Health issues, lower risk tolerance, spouses saying, “get out and spend time with me and our grandkids,” and just wanting to relax.

The bottom line, demographics is the driving force (not that all sellers are in this age range, just a lot of them).

Corporate baloney

What about corporate baloney? We have a few articles in our “writing folder” (articles I’ve saved to write about) on bad management, how technology is replacing people, and employee unhappiness. Gallup recently released a five-year-long study showing the variance between high and low productivity is 70% attributable to the manager. For years the annual Gallup study has shown only about one-third of employees are highly engaged. In successful businesses (and successful departments I’m sure) with good managers the figure is above 68%.

In other words, people are more and more getting fed up with corporate life and those willing to make the leap of faith are doing so at a good clip. They’re betting they are smarter and better managers, leaders, and operators than their corporate bosses (usually these people are better than their bosses but get trapped in the corporate labyrinth) and they’ll benefit financially and emotionally with their own business (which most do).

Growth

There’s a reason we published the book Company Growth by Acquisition Makes Dollars & Sense. It’s a strategy more and more businesses are interested in given how hard it is to find people, especially good salespeople, grow organically, start a new location, steal customers from competitors, acquire new products, and many other reasons (there are 19 reasons to consider growth by acquisition in the book).

While it’s tough to buy a direct competitor, almost every seller will fear giving the “secret sauce” to a direct competitor, there are plenty of other options, including buying a:

  • Customer’s company
  • Supplier’s company
  • Similar firm in a different market
  • Synergistic product line firm
  • Company with equipment you need (and customers to go with it)
  • Contract manufacturer (of your product)

Easy money

It’s not reckless money like it was 15 years ago but financing options abound, including for lower middle market and below sized deals.

For larger deals there’s more money than deals so investors are everywhere. But it’s the current SBA loan program that’s a win-win-win for buyer, seller, and bank (the SBA doesn’t make loans they guarantee a large portion to the bank).

In the second edition of Buying A Business That Makes You Richthe section on creative financing was almost eliminated because of the SBA program’s current iteration it removes the need for most creative financing techniques. It’s because these loans have following features:

  • $5 million loan limit (meaning up to a $6-7 million deal).
  • Ten-year amortization.
  • Cash flow is king (they don’t require full collateralization, but will take as much as they can).
  • Ten percent buyer down payment (minimum), which frees up cash to grow the business.

In addition, some banks are now adding junior debt (second position, higher interest rate) on top of their SBA loan to get to a $9-10 million deal.

Conclusion

Let’s conclude with a prognostication. Barring unforeseen events like the Great Recession or 9-11 this should continue. Demographics are driving it and the other factors are fueling it. The business schools turn out some pretty sharp people who let the corporate world hone their skills and build their capital. And, they are taught to think about add-on acquisitions. Even an economic correction won’t slow this trend. John’s 25 years in this business and an additional dozen or more his friend Ted Leverette has have shown us “normal” corrections, aka recessions, don’t have much effect on the buy-sell market. Older owners will want out instead of fighting the fight and the corporate baloney will increase, providing us with the buyers.

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