Modest Small Business Acquisitions Growth Amid High Interest Rates and Inflation

Small business acquisitions have experienced a modest growth of 2% in Q3 2023 compared to the previous year, according to the latest BizBuySell’s Insight Report. This growth comes after a 13% drop in Q4 2022, suggesting that the market is stabilizing despite high-interest rates and inflationary pressures. In Q3 2023, a total of 2,281 businesses were sold with an enterprise value of $1.65 billion, a 4% increase from $1.59 billion in Q3 2022.

Evolution of Deal Structures in a Challenging Economic Climate

While prime-based SBA loan rates have increased, deal structures are evolving to bridge financing gaps. Lenders now require more seller financing, typically representing 10–20% of the purchase price over 5–10 years. Cash buyers still hold an advantage in today’s fast-paced environment, where speed is crucial. The median days on the market dropped from 182 days in Q1 2023 to 164 days in Q3, indicating that motivated buyers and sellers are finding ways to close deals.

Rising Median Sale Prices Reflect Steady Demand

The median sale prices for small businesses have increased by 10% to $329,000, highlighting a consistent demand for healthy businesses. However, small business valuations have remained relatively flat, with cash flow multiples declining by 1.4% and revenue multiples rising by just 1%. This suggests that buyers are still exercising caution due to economic uncertainty.

Challenges for Sellers, Opportunities for Buyers

Despite modest growth, seller confidence remains low, with 64% of small business owners citing high-interest rates as detrimental to their businesses. Additionally, rising overhead costs and minimum wage increases are negatively impacting profits, leading 46% of sellers to raise prices and 40% to delay expansion plans. In contrast, buyer confidence has dropped slightly but remains optimistic, as 73% believe they can buy at an acceptable price.

courtesy of smallbiztrends.com

Key Sectors and Trends

The manufacturing sector has experienced significant growth and financial performance, with a 13% increase in acquisitions and a 28% jump in median sale prices in Q3. On the other hand, the retail sector has struggled, with median prices dropping by 18%. Restaurants have seen a 20% growth in revenue, but profits have been affected by higher costs. The service business sector has experienced a slight decline in transactions and median prices, signaling a potential correction as buyers diversify into other sectors like retail and restaurants.

Evolving Financing Landscape and Deal Structures

The financing landscape is evolving as capital costs rise. Seller financing is becoming increasingly important to bridge valuation gaps, with buyers expected to carry 10–20% of the purchase price. Creative earnouts and seller notes are also being utilized. While SBA loans remain the top financing method, they can take longer to close due to tighter rules. Lenders are now requiring higher debt service coverage ratios, leading to an increase in seller financing. Despite longer deal timelines, buyers and sellers are finding ways to adapt.

Opportunity for Buyers Despite Economic Headwinds

Healthy businesses continue to be in demand despite economic challenges. Buyers who can act quickly with all-cash offers have a distinct advantage. The median days to sale have dropped to 164, indicating motivated buyers and sellers. With valuations remaining flat, buyers can find opportunities for more favorable pricing. Almost 40% of buyers see current conditions as a chance to acquire quality businesses amid the wave of Baby Boomer retirements. Furthermore, over half of the buyers have prior business ownership experience, indicating a pool of experienced entrepreneurs ready to take advantage of these opportunities.

bout the BizBuySell Insight Report

The BizBuySell Insight Report offers a quarterly view of the health of the U.S. small business transaction market. The report analyzes data from 50,000 businesses for sale and sold nationwide, tracking closed transactions, valuation multiples, and other key indicators. With transaction data reported voluntarily by brokers, the Insight Report covers 70+ markets across 65 industries. As the largest online business-for-sale marketplace, BizBuySell leverages its platform to produce this nationally recognized benchmark report.

courtesy of smallbiztrends.com
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