Business for Sale Market During COVID-19: A Paradox of Unique Opportunity and Uncertainty

As Transactions Rebound to Pre-pandemic Levels and Sale Prices Rise, Sellers Remain Cautious

New data from BizBuySell’s small business confidence survey and recent business for sale transactions reflects a market driven by opportunity seekers and business owners either well-positioned to profit or forced to exit.

BizBuySell's 3rd quarter 2020 Insight Report, a nationally recognized economic indicator which aggregates statistics from business-for-sale transactions, shows a steady upward trend in sales since the pandemic hit. In April, transactions showed a 51% year over year decline, shrinking the deficit to 21% in July, and then just 5% fewer deals in September.

Separately, owner confidence fell to a low of 45, down from 52 in 2019, with the primary driver being concerns over business value. Owners validate buyer sentiment, with 68% surveyed believing they would have received a better value if they had sold last year - almost double the 37% surveyed in 2019. Intuitively, 71% of these owners pin lower value on being impacted by the pandemic.

"We’re a Corporate Caterer. Our minimum order used to be 25 guests, now we’re lucky to cater 10 lunches bringing our revenue down 80 - 85% since this same time last year," said Kelly Kearney of Pacific Fine Foods in Alameda, California. Fortunately for Kearney, she’s been able to adapt her business model and is now in the process of finalizing the sale of her business during the pandemic.

According to Emmet Apolinario, CEPA, CVB of Sunbelt Mergers & Acquisitions in Ohio, there’s plenty of interest in these pandemic impacted businesses that can adapt. "If the business has been negatively affected but is open now and has evolved into a something suitable to the pandemic, buyers do still find them attractive," said Apolinario. "For example, a bakery I am representing took 6 weeks to implement an online ordering system. Not too long ago they were forced to close and now they’re under contract to be sold."

Median Sale Prices Jump 20%, Driven by High Demand for Pandemic-Proof Businesses

While opportunistic buyers may be expecting deals, the most sought-after businesses are "essential", meaning pandemic proof, performing well and unlikely to come at a discount. Due to increased popularity of these businesses, the median sale price of businesses sold in the 3rd quarter grew 20% versus a year ago as stronger businesses cross the finish line.

According to Lana Hout and Adrianna Smith, Managing Brokers at First Choice Business Brokers in Los Angeles, while discounts are driving interest, it’s these businesses that are driving sales.

"The market over the past three months has been extremely busy, particularly due to essential businesses being in such high demand. Despite what’s going on, these businesses continue to thrive," says Hout.

According to BizBuySell’s Confidence survey, 1 out of 5 businesses are outperforming the period prior to the pandemic. In limited supply and not only weathering, but thriving during the pandemic, these businesses may have a higher price tag, but offer less risk. They also deliver a higher return, as indicated by a 14% and 8% respective increase in median revenue and cash flow for businesses sold in the 3rd Quarter.

"Any business making money during this crisis is golden," says John Davanzo, owner of Animal Atlanta in Georgia. These business owners are faced with a good-to-have, yet difficult decision on whether to cash in on the favorable situation or hold tight for even higher value. The decision becomes even more complicated for those specifically thriving because of the pandemic but with risk of losing value when the pandemic ends.

"Smith cautions buyers to be aware of the "stickiness" driving success for these businesses when assessing value. "Ask what happens when we have a vaccine and life resumes to normal. If the business has pivoted in a way that provides lasting profitability and added margins, they’re worth the additional investment."

Buyers unable or unwilling to pay the premium price of resilient businesses are overflowing toward opportunities impacted by the pandemic. However, these businesses are not guaranteed to come at a discount, at least on the sticker price.

"I'm seeing a lot of owners trying to sell or cash out right now, thinking business value is at 2019 levels. COVID has changed all that. Too much uncertainty to get those asking prices," says Josh Reuter, owner of Lane Motors, a retail business in Illinois.

Supporting Reuter’s point, the median asking price of businesses currently listed for sale on BizBuySell is $299,000, which is 4.9% higher than a year ago and a tick higher than the $296,000 last quarter. Once again this is influenced by more valuable businesses on the market, but prices do not appear to be countered by dramatic price reductions either.

"I've been shopping around and, having lived through several peaks and valleys, I do not yet see any precipitous drop in for sale prices as I have in other eras and economic swings; certainly nothing like panic selling," said Bill Evans, owner of Western Academy in Colorado.

While sellers do not appear be panicking as Evans suggests, weaker businesses are staying off the market as owners assess their options and the value of their business.

"It is really hard to value my company because it had been sidelined due to COVID-19. It would be easier to figure a value is we knew when we could re-start operations," said Richard Shea, owner of Bang Events, LLC, a special events company in Virginia.

Asset Sales Become an Increasingly Popular Path to Business Ownership

The only sure discount for value shoppers is likely to come by way of a business asset sale. In these sales, the buyer is not purchasing an operating business, but is purchasing a portion or all the business’s assets such as inventory, equipment, supplies, licenses and real estate. As these are non-operating businesses, there is no multiple associated with any cash flow, providing a very low-cost entry point.

"Restaurant asset sales are going gangbusters right now because they can’t sell based on the multiple," said Apolinario. "Sellers are just asking to get rid of their equipment or get out of their lease."

Of course, with an asset sale the buyer doesn’t benefit from an existing customer base and cash flow, so it’s not a slam dunk either and best suited for experienced entrepreneurs. Asset sales tend to be a perfect solution for existing owners looking to size-up or expand. According to BizBuySell’s survey, 47% of buyers are considering purchasing the assets of a closed business.

"There has been an increase in asset sales for businesses in industries that have been greatly impacted by the shutdowns due to the pandemic such as gyms, restaurants, hair and nail salons to name a few. The best ones will be able to sell, but unfortunately many will have to close down as there will be an oversupply of these assets available in the marketplace and not enough buyer demand," says Hout.

Per Hout’s point, owners planning on an asset sale should consider expediting to get ahead of the increasing number of hitting the market.

Most Baby Boomers Impacted by the Pandemic Choose to Hold on to Their Businesses, for Now

In recent years, business-for-sale supply has been fueled by retiring Baby Boomers, of which the lion’s share has yet to hit the market, according to Andy Kocemba, President & CEO of Minnesota based brokerage Calhoun Companies. Battle tested from the Great Recession, but now nearing retirement, these owners are having to assess their exit plans given the unknown duration of the pandemic.

Complicating matters, 66% of Boomers surveyed have seen their business decline since the onset of the pandemic, with just over half (51%) adjusting their exit timeline as a result. "Baby Boomers are the generation that did not plan, which makes it harder for them to adjust transition plans if they were already ready to retire," says Smith.

Ultimately, Baby Boomers must decide whether selling at current values will support their future lifestyle. Of those who have adjusted their exit plan, 67% are extending their timeline, hinting that the answer is "no" for most. In fact, among Boomers not selling in today’s market, 41% say its due to an expected lack of return.

For those with enough capital to move on, the decision falls to risk tolerance, personal timeline and expectations for a return to normalcy. Regarding the latter, Baby Boomers anticipate a faster recovery than others. Forty-three percent (43%) of these owners expect the small business economy to return to pre-pandemic levels within 12 months, with 20% expecting a 6-month recovery. This compared to a 33% and 13% of non-Boomers who feel the same, respectively. The older generations timeline expectations line up well with Smith’s forward-looking projections.

"Because small businesses don’t have the infrastructure and management teams in place to wait out a bad cycle, we see Baby Boomers only being able to wait 6 months to 1 year to sell, if that," says Smith, while cautioning the following. "If you are losing value due to the pandemic and have enough cash flow to weather the storm, you may be better off waiting until things recover. Otherwise, you are probably better off selling now. The longer things draw out, the more of a discount you are going take, not just on cash flow but based on increasing uncertainty."

Pandemic, Policy and Election Concerns Remain Largely Divided

While business performance is a direct concern for owners, overall safety and wellbeing is the driving force. In March, during the onset of the pandemic, the U.S. swung full tilt toward virus control with federally imposed safety restrictions shutting down all but essential businesses. Of course, these measures paralyzed hundreds of thousands of businesses, so it’s not surprising that 94% of owners do not consider further shutdowns an option. However, owners are far more divided in terms of what actions officials should take.

Of surveyed owners, 32% believe the Federal Governments best route to an economic recovery with public health considerations is enforcing a national plan for a phased re-opening including social distancing and employing masks. In fact, 65% of surveyed owners in areas with mask mandates would require masks regardless. Remaining owners are split with 28% advocating for removal of all pandemic-related business restrictions and 28% preferring responsibility fall on each state.

In terms of economic stimulus, owners are split with 52% in support of additional funding for impacted small businesses and employees. A muddled roll out of prior stimulus could be a contributing to some entrepreneurs doubting the effectiveness of another. In fact, of owners who received a PPP loan, 57% have at least some concern over loan forgiveness.

"I'm concerned that the money sent over from my PPP loan will be asked for back in a manner of time in which my industry is not yet performing to the capacity to repay. I don't trust the banks will give certain industries a variety of timelines," says Dennis Bergeron, owner of Myxed Music Group in Colorado.

For Carolyn Sinclair, owner of Adrienne's, a women's consignment clothing boutique in North Carolina, confusion around PPP loans was enough to withdraw herself from the process.

"I returned my PPP loan a few days after I received it. It seemed like a loan that was going to turn into a nightmare due to the changes the government kept making to it. I also received a 100% forgivable disaster loan from the SBA, and I kept that and was very grateful. It made a huge difference," said Sinclair.

These repayment concerns are also stalling some business for sale transactions. Twelve percent (12%) of owners are choosing not to sell because they’re waiting for their PPP loan to be forgiven or easily transferable. According to Apolinario, a new October 2nd ruling by the SBA, Procedural Ruling 5000-20057 Oct 2, 2020, may make it even more difficult to transfer a PPP loan.

With the election ahead, each of these topics will be top of mind as owners weigh which candidate is best for the country and their business. In fact, according to BizBuySell’s survey, 20% of owners say a candidate’s ability to help their business is the most important factor in their voting decision, with another 52% say it’s an important factor. At the moment, according to 47% of owners, the best candidate for the small business economy or their business specifically is President Trump, with 21% instead preferring Democratic presidential nominee Joe Biden.

Small Business Looks Forward to a Return to Normalcy

As we round the stretch of the most uncertain year in decades, all eyes are tuned to the election with hope that whoever occupies the oval office on January 20th will encourage policies that restore the country to a pre-pandemic environment. While Americans await the outcome, some transactions are certainly being put on hold.

"I’ve been in this profession and industry going on 17 years. I have seen several elections (and recessions too) and one thing I have to say is yes, elections do have an effect," said Apolinario. "From the banking side, I have buyers who have recently approached banks for financing and the banks are saying they’re not underwriting until after the election. Other buyers are using the election as an excuse to hold off on making an offer."

According Smith and Hout, the key concern for both owners and buyers are changes to tax policies and in specific, capital gains tax. The combination of election concerns pausing plans and weaker businesses staying out of the market is making for less inventory, with listings down 13% year-over-year. One thing that could certainly boost that number as well as the number of businesses being sold is another stimulus package.

Despite debate on the amount needed for an additional round of Federal support, the fact is, the CARES Act encouraged small business acquisitions in 2020. In this program, the SBA will cover 6-months of principle and interest on 7(a) acquisition loans that were closed before September 27th, 2020. This program especially made distressed businesses more attractive as it provided a cushion of extended cash.

"The recent CARES Act incentives provided motivation for many seeking SBA loans to purchase before the Sept. 27 deadline," said Todd Concienne of Happy Heart Homes LLC, Happy Heart Enterprises, Bulldog Boat Storage LLC in Texas.

In addition to the CARES Act, the record unemployment rate is attracting many new buyers to the market. According to BizBuySell's 2020 Small Business Confidence Study, 27% of buyers are newly unemployed and looking for more control of their future. In fact, the number of buyers searching for a business on BizBuySell has reached new highs, well exceeding pre-pandemic levels. For experienced individuals, entrepreneurship is an even more attractive, especially those not ready with retirement.

"As a Boomer, I’ve had it with working for someone and I want to be in control of my destiny and when I want to stop working. There is an eCommerce opportunity with no family heirs that I’m waiting to see if my offer has been accepted," said one potential buyer. Another added, "I am 58 years old and have not had any success getting interviews with potential employers."

As America awaits political and economic clarity, most owners (75%) are anticipating a full return to pre-pandemic levels to occur in the next 2 years, with half expecting a recovery within the next 12 months. Buyer timelines lean slightly longer at 70% and 32% respectively. According to Apolinario, however, each day brings new optimism for the business-for-sale market.

"Many others and I in the business brokerage industry believe 2021 will be the perfect storm for business sales. With each passing day, 10,000 Americans turn 65, many of which are business owners with excellent businesses. The pandemic has been a signal for the owners to let someone else steer the ship," says Apolinario. "Even in a pandemic, the fundamentals of an attractive business do not change. As long as these profitable, stable operations are available, plenty of buyers will be waiting."

Q3 2020 Small Business Financial Health

Although Q3 transactions dropped 16%, the financials of businesses that sold exhibited solid growth. The median revenue of sold businesses grew 14.2% from $554,763 to $633,494, while the median cash flow increased 8.1% from $125,000 to $135,119.

The Average multiple of cash flow reported has remained consistent at 1.5% growth, from 2.37 in Q3 2019 to 2.41 in Q3 2020. This suggests that buyers are receiving strong value, buying the best performing businesses at consistent underlying valuation metrics.

Q3 2020 Small Business Values

The median of sale price of businesses sold in the 3rd quarter was $299,500, a 19.8% jump from a year ago. Asking prices had a correlated 17.6% spike to $327,000 from $299,500. These mighty increases are an indication of the types of businesses transacting in the COVID-19 era. With many businesses negatively impacted by the pandemic, buyers with means are paying a premium for resilient businesses that are thriving well past pre-pandemic levels. At the same time, the impacted businesses which would have sold prior to the pandemic are now having a challenging time or staying on the sidelines altogether.

Q3 2020 Industry Breakdown

With rebounding transactions in the 3rd quarter comes good news for all sectors, especially that hardest hit from the pandemic. Thirty percent (30%) more restaurants sold in Q3 versus Q2, while maintaining the same median sale price of $150,000. This is a positive sign for a sector that has been hurt by the pandemic and prone to asset sales.

Elsewhere service businesses saw a 35% gain in transactions versus the Q2, with retail businesses jumping 50% and manufacturing doubling in volume though with a lower sample size.

Q3 2020 Top Performing Markets by Sales

In the top 10 markets by deal volume, transactions have rebounded, especially in areas previously hit hard by COVID-19. The New York City market, which reported just 57 transactions in Q2 (-65% YoY), increased to 125 in Q3 (flat YoY), the most sales of any market. Los Angeles and Tampa reported 114 (+25% YoY) and 110 (-16% YoY) respectively. Miami, another COVID hotspot in April, reported 95 sales (-13% YOY) in Q3 compared to 47 (-62%) in Q2.

Q3 2020 by Deal Size

In the third quarter of 2020, 16% of businesses sold above $1 million, which due to their value and scale, had a cash flow 42% higher than average. As higher-priced deals typically take weeks longer to complete, these businesses sat on the market for 216 days,16 days longer than the 200 median for all businesses. Overall, the median days on market for all small businesses sold in the 3rd quarter was 200 days, an 18% increase over the same period in 2019.

For context, in Q2 of 2020, $1M+ businesses sat on market 6 days longer than the overall median of 196 days. In recent years, days on market for both $1M+ and all listings declined in the first half of the year before increasing in the second half. However, in 2020 days on market has grown for each of the first three quarters.

The pandemic is likely at the root of these longer time frames resulting in delays across almost every aspects of the transaction. This includes having to re-assess financials either positively or negatively impacts from the pandemic, navigating ever changing financing regulations, and overall market confidence.

Of course, then there are those that are simply waiting to catch the right wave as noted by Cindy Hinton, owner of Maui Grocery Service, Inc. in Hawaii, "We are not in a rush, so we can wait for just the right buyer."

"The Pandemic has increased the time businesses are on the market and slowed down deal closings. Not only have the businesses that endured significant shutdowns been extremely difficult to sell during the Pandemic, closings have been extended in many cases due to buyers mandating to delay closing until seeing how the business performance responds as the economy reopens," said Smith.

Hout adds, "The time on the market for listings are also increasing due to Sellers trying to salvage and maximize the value of their pandemic-impacted businesses by pricing higher while many buyers are looking for opportunities to buy businesses at a discount as a result of the pandemic."

About the BizBuySell.com Insight Report

The BizBuySell Insight Report is a nationally-recognized economic indicator that tracks the health of the U.S. small business economy. Each quarter, BizBuySell analyzes sales and listing prices of small businesses across the United States based on approximately 50,000 businesses for sale and those recently sold, reporting changes in closed transaction rates, valuation multiples and other economic indicators for the small business transaction market. Closed transactions are reported to BizBuySell.com on a voluntary basis by business brokers nationwide. Each report includes real small business data on over 70 major U.S. markets and across 65 small business industries.

BizBuySell is the largest business for sale marketplace online, receiving over a million visitors a month. Since 1996, BizBuySell has offered tools that make it easy for business owners and brokers to sell a business, and potential buyers to find the business of their dreams. The website also features an extensive franchise directory as well as an easy-to-use business valuation tool.

NOTE: For the most recent statistics, please see the latest BizBuySell Insights Report