Tariffs and on-going trade tensions with China have caused anxiety with many Americans already looking at an economic slowdown. Yet, this uncertainty has only impacted some areas of the business for sale market. According to BizBuySell’s Q3 2019 Insight Report, business for sale transactions dipped slightly year-over-year, while trending downward throughout 2019.
However, transaction activity still remains at historically high levels, out-pacing levels from three-four years ago. Furthermore, the financial performance of businesses being bought and sold on the market is on an uptick.
What does this economic climate mean for people looking to buy or sell a company? Q3 2019 indicators suggest the small business market remains active and healthy around the country. The legendary growth enjoyed throughout 2018 and early 2019 remains strong, even if transaction volume dropped off somewhat.
The Impact of Economic Uncertainty in Q3 2019
Two factors could be at play influencing small business sales: tariffs and the upcoming U.S. 2020 election. Market volatility can cause buyers to feel some hesitation to close a deal, causing sales to stagnate. Hence, the performance of the economy has an effect on the perceived value of a business.
As the 2020 election nears, buyers, sellers and brokers are nervous about the outcome. So far, buyer hesitation due to tariffs is one of the biggest concerns of brokers. If buyers become convinced that 2020 isn’t a good time to buy, it can have a negative impact on business sales.
Yet, small business financials indicate a steady economy. Q3 2019 transaction data shows median revenue increased to $554,763, up 4.5% year over year. At the same time median cash flow experienced growth as well, rising 7.5% to $125,000.
With these solid financials, it’s no surprise that many sellers are asking a higher price for their businesses. The median asking price of sold businesses went up 3.3% compared to 2018, reaching $278,000.
However, the sales price of sold businesses has stayed virtually equal, indicating many buyers aren’t prepared to pay a higher asking price. With concerns about the outcome of the 2020 election and its impact on everything from tariffs to profitability, some buyers are noticeably worried.
The Impact of Tariffs on Business Value in Q3 2019
For many brokers, tariffs in 2019 created some difficulty related to negotiating transactions, yet overall remained a minimal issue. In fact, over half of brokers who participated in a recent BizBuySell survey said they did not notice any real impact on the value of businesses resulting from tariffs.
Yet, business valuation has become more challenging in a world where no one is certain how long tariffs will remain in place. If a business is impacted by the cost of Chinese goods, it can be difficult to project cash flow and overhead costs, making negotiations trickier and more time consuming.
Looking at Q4 2019 and Beyond
Overall, the sale of small businesses dropped by around 8% in Q3, which is significant but not a major blow to the market. In fact, the numbers indicate that there are plenty of business owners closing deals. Compared to the 1,814 small businesses sold during Q3 2015, the total 2,454 sold in Q3 2019 shows transactions are still going strong. This is an increase of about 35% in just a few years.
As 2020 approaches, business owners and brokers are keeping their eyes on tariffs, learning to adapt and taking steps to guarantee continuing profits. For people searching for a business to buy, there are lots of amazing opportunities available. Depending on the local market and the industry, buyers may be able to negotiate favorable terms by capitalizing on prevalent fears related to tariffs and political candidates.
On the other hand, sellers who are willing to wait for the right prospect can also obtain a great value for their business. Even with the market worries at the beginning of the year, sale prices for small businesses have remained constant. In other words, Q4 2019 and 2020 appear to have something good in store for everyone.
Luba Kagan is the Strategic Partnerships Manager at BizBuySell