By Helen Liu
As we approach the end of 2021, it is time to look back on the year and see what we’ve learned, review how the market has changed, and contemplate what we can expect to see in the new year. This was the second year that the whole world had experimented with adapting to life with COVID.
For many small business owners life came to a halt in 2020 as the COVID-19 virus erupted unexpectedly, forcing all of us to take extreme measures to limit the spread. After the initial shock that year, we either learned to adapt, or shut down business for good. Although shutting down was the only option for some in certain industries, the businesses that survived inadvertently created the groundwork for new ways to successfully conduct business remotely. In 2021 people slowly moved from experimentation into normalization; after creating new systems that worked the focus turned to normalizing sales and profits again.
New operational foundations, coupled with successful stabilization contributed to a steady, quarter-by-quarter recovery to the market of small business sales in terms of the volume of transactions and quality of deal prices. As buyers became more and more confident in pandemic-proof businesses, their deep concerns about risk in uncertain times was appeased by the positive results they were seeing in the financials of listed businesses.
In 2021, The number of businesses being bought and sold climbed by 11% in the third quarter, and 11% year-over-year, according to BizBuySell’s Insight Report, which tracks and analyzes U.S. business-for-sale transactions.
The median revenue of businesses sold in the third quarter was $671,713, up 6% year-over-year. Meanwhile, buyers began paying record-high prices for businesses that had continued to perform well during the pandemic. The median sale price in the third quarter hit a new high of $349,500, up 9% from last quarter, 17% above the previous year and 40% above 2019’s Q3 pre-pandemic levels. With many businesses having recovered from peak pandemic losses, today’s market presents an opportune time for owners to exit.
Valuing businesses had also become a great challenge to Brokers and other valuation professionals. With 18 months of financial numbers more resembling a roller coaster track rather than a steady straight-lined incline, there was no black-and-white formula to value a pandemic-impacted business properly. However, toward the second half of 2021 as lenders and buyers could see that 2020 was an anomaly, it had started to become possible to omit 2020’s pandemic impacted financials from the track record if the business could show proof had it had fully recovered in its financial statements.
In the chart below it appears that seller-market sentiment returned to levels reported before the pandemic. Market confidence is further reflected in the final sale prices sellers received in Q3. In fact, sellers in the $5 million to $50 million sector realized, on average, a sale price that was 106% of benchmark. Overall, across all sectors, businesses received 96% (average) of benchmark in Q3 2021.
Source: IBBA Market Pulse Q3 2021
Who is buying?
We have seen private equity as the leading buying force throughout most of the pandemic, but we expect that corporate buyers are going to re-enter the market, seeking growth by acquisition. This prediction comes from the issues within the labor force since unreasonable wage demands and unwillingness for people to return to work make it hard for a business to grow organically. Thus, more middle to large-sized businesses are going to look toward acquisitions as a means for growth where labor forces can be combined to keep payroll numbers the same while taking on more clients, markets and revenue streams. For smaller businesses without the ability to acquire other businesses, finding the right labor at a pay rate that won’t kill the bottom-line is even more arduous. In 2021, many of our business owner clients shared with us that keeping the payroll cost down has been one of the greatest challenges.
Lastly, let’s look at what the buyers are buying. In the figure below, construction/engineering firms topped the list of hot industries this quarter, thanks to the Congress’s passing of $1 trillion Infrastructure Bill. Business services also had a strong showing in the Main Street market, while manufacturing deals were active in the lower middle market.
Source: IBBA Market Pulse Q3 2021
A Great Year Ahead
All in all, Q3 of 2021 showed renewed confidence of investors in the future of our economy. The transactions that our local Bay Area team closed this year echoes the same market confidence. Our volume of transactions this year doubled the number of transactions closed in 2019.
We see that facing uncertainty again while near retirement age triggered many business owners to rethink their lives. Having spent time at home because of pandemic guidelines, they started to realize that spending more quality time with their families rather than being consumed by work was what the next step in their business plan needed to be; plan to exit now rather than down the road. At the same time people with more resources and better ideas and systems entered the market to give businesses a facelift.
If you are thinking about selling your business, I welcome a free consultation to answer your questions or hear what your plans are for the future. The right preparation will help you maximize the value of the business that you’ve built with your own hands. We look forward to being the guiding light to your exit plans in the new year.
On behalf of our team, I wish you, your families and all those dear to you a happy holiday season and a very successful year in 2022!