Mid-Year Market Report 

30.05.24 06:08 PM By MARK HERRMANN

Mid-Year Market Report

The business-for-sale market has shown its ability to tolerate higher interest rates and continue its path toward a post-pandemic recovery. Despite the challenges of inflation and minimum wage hikes cutting into profits, the economy remains strong, unemployment is relatively low at 3.8% and a recession seems less likely.

Still, maintaining healthy financials amid rising inflation can be challenging. Add high interest rates to the mix and the question is whether to remain on the sidelines until conditions improve or to move forward. Owners appear optimistic that the future will present a profitable exit ramp if desired. When asked to name their most difficult and profitable year, the majority (31%) of owners said 2020 was their most difficult, while 41% said they expect 2024 to be the most profitable.

Furthermore, 14% of owners say they are actively selling their business while 17% plan on selling between now and next year. Of buyers surveyed, 87% say they plan on buying a business within the next two years and most (53%) say they are not delaying their timeline until interest rates drop. This compared to 24% of buyers who are delaying and the final 23% unsure.

2024 Deals Expected to Pick Up Pace, More Sellers Plan to Offer Seller Financing

As buyers and sellers adjust to current conditions, transaction activity is expected to pick up pace. With interest rates not likely to come down until the latter half of the year, if at all, buyers and sellers have less incentive to wait on the sidelines. Moreover, economic output is expected to expand this year, mainly due to the resilience of the U.S. economy, according to a recent International Monetary Fund forecast.

Friar offers his perspective, “My prediction is that seller activity will pick up in Q2 and Q3, leading to a very robust Q4 2024 and Q1 2025 in terms of closings. I also feel that, barring any major economic disasters, 2025 will be a very strong year for sellers engaging to sell. This is because: a) seller sentiment will continue to tick up; b) rates may finally start to tick down; and c) there will be clarity on the 2024 election results and therefore policy decisions affecting the economy for the next four years.”

Changes in deal structure are one such way transactions have moved forward. More sellers are coming to realize that some level of seller financing, typically 10-20%, should be expected to secure the deal.

Buying Businesses with Commercial Real Estate Can Offer Longer Repayment Terms

Businesses that include commercial real estate loans allow buyers to spread the term to 20 years. Gagnon discusses recent restaurant acquisitions, “We saw increases in selling prices of 78% and some of this was attributable to larger deals that included real estate. We’re seeing more cash deals and on financed deals, more with real estate, which is spreading the term to 20 years.”

The SBA’s 504 loan program provides long-term, fixed-rate financing, which can be used for purchasing or construction on existing commercial buildings or land, as well as new facilities. Depending on the lender, repayment terms can be 10, 20, or 25 years.

Sellers More Likely to Attract Buyers with Well-Managed Businesses and Strong Financials

In today’s market, sellers can increase their chances of a successful sale by developing a strategy of looking at it from a buyer’s perspective. Lisa Riley, CEO and M&A Advisor at Delta Business Advisors, says sellers should adopt three key practices:

“First, maintain transparent financials—eliminate any discretionary spending to clearly demonstrate the business's profitability. Second, take vacations—start with a weekend or two, then extend to a few weeks, or even a month, to show that the business can thrive without your constant presence. Third, invest in the right management team to increase the attractiveness and resilience of your business,” says Riley.

Excerpted from the BizBuySell Insight Report

The BizBuySell Insight Report is a nationally-recognized economic indicator that tracks the health of the U.S. small business economy.