The Situation
In spite of the precipitous decline of M&A transactions in early 2020, we saw an unprecedented bounce back during the second half of the year. “M&A activity remains strong despite COVID, with deal counts nearly the same as last year at this time,” according to the AM&AA Q1 2021 M&A Market Report – National and Regional Data.
And 54% of business brokers surveyed as part of the most recent BizBuySell's Insight Report expect the business-for-sale market to return to pre-pandemic levels within a year. “A resounding 87% of business brokers expect more owners to sell their businesses in 2021, with 35% expecting significantly more.”
“The stage is set for an acquisition spree,” claims the M&A monitor Q4 2020: outlook for the year ahead report from Freshfields Bruckhaus Deringer.
If the forecasts for the coming year are correct, we will see a continuation of the M&A rebound we saw in the second half of 2020 – great news for any business owner who is thinking about selling their business in the coming year! It also means that owners who have been putting off their exit planning need to start now to take advantage of market conditions.
The Details
According to BizBuySell's Insight Report, which tracks and analyzes small business-for-sale transactions and the sentiment of business owners, buyers and brokers,
- 7,612 businesses were acquired in 2020, compared to 9,746 in 2019.
- The number of small businesses sold in 2020 dropped 22% compared to 2019. This was the largest year-over-year drop since 2009 at the start of the Great Recession when transactions dropped 28%.
- The median sale price rose 12% to $279,950, with revenue and cash flow reaching record highs.
- The median cash flow of sold businesses grew 10.7% over 2019 to $135,567 while revenue increased 8.2% to $613,341, which speaks to the quality of businesses changing hands.
- It’s a Seller’s Market for ‘Pandemic-Proof’ Businesses: While many businesses were hit hard by the pandemic, some sectors instead found favorable conditions. The economic disruption caused by the virus changed consumer behavior, and ‘pandemic-resistant’ businesses, such as delivery and logistics companies, fast-casual restaurants, e-commerce websites, and manufacturers of certain goods saw revenue soar in 2020.
The most recent AM&AA survey indicates that sellers continue to be most motivated by personal factors such as age/retirement, health/family, and personal financial considerations. It also highlights a number of changes and challenges to the deal process that M&A professionals are having to deal with such as:
- Deals taking at least 2 months longer to close than before COVID.
- Uncertainty in seller finances and market/economic conditions making deals more difficult.
- Deals requiring more work in diligence, particularly longer reviews of financials and customer information.
- Deals requiring more negotiation of deal terms, predominantly in the buyer’s favor, in order to accommodate higher than normal uncertainty and get the deals to close.
The Bottom Line
Economic recovery from the pandemic is uneven but improving. BizBuySell’s survey shows that 52% of small businesses are still experiencing reduced demand, while 25% say they are unaffected by the pandemic, and 23% report an increase in customers. The more fortunate owners have been able to command higher prices for their businesses as evidenced by the numbers above. If you hope to be among them and capitalize on this trend, it’s time to get your business in shape.
There are numerous indications that there will be more sellers entering the market this year. One broker cites three reasons for this: “Baby boomers are aging out; COVID fatigue and uncertainty; a new administration that has signaled higher taxes are on the way. This could provide a lot of incentive for owners to sell.” More sellers in the market also translates to increased competition for buyers’ attention in the months to come.
If we’ve learned anything from this last year, it’s that there are always external factors, beyond our control, that can impact our businesses and the timing of our exit. However, if you’re prepared to cash out of your business when the market fully returns, you will be able to position your business for a successful exit – whether to external or internal buyers. Get educated on all the things you should do in advance of your exit as you seek to preserve the continuity of your company, maximize business value, and achieve your exit goals.
Ensure that your exit is successful by planning in advance! It is worth the effort.
Take the next step to ensure your future and the future of your business. Join our Expert Mastermind Group, which is launching soon and let us help you develop your plan.
You will learn from your peers and our work with more than one hundred business owners through three live 90-minute monthly calls that will include:
- Discussion of Best Practices with Q&A
- Interviews with owners who are successfully exiting their businesses
- Webinars with experts on advanced topics, such as:
- Tax Planning
- How to maximize business value
- How to minimize risks in your business
- Key employee retention strategies, and much more!
Don’t let another year go by without a plan!
