Cyclist Matt Holloway, 44, calls a mountain-bike race he rode in three years ago the “most expensive race of my life.”
During the race, Holloway chatted with a fellow cyclist who mentioned that he owned a bike shop, which he was looking to sell. Holloway was working at the time as a bicycle technician at Eastern Mountain Sports, but had been thinking about striking out with a business of his own. The two men began working on a deal for Holloway to buy the bike shop.
Three years later, Henry’s Bikes, the Newark, Del., store that Holloway purchased is doing so well that it’s about to move to a larger location.
Holloway’s not the only one tapping his inner entrepreneur with a small business purchase. After several years of sluggish sales following the recession, the market for buying and selling small businesses is finally making a comeback.
In the third quarter of this year, small business transactions jumped 42 percent over the same period in the previous quarter, to reach nearly 1,700 closed transactions, according to a report by online business-for-sale marketplace BizBuySell. Sales of restaurant and retail businesses led the way, with transaction growth of 11- percent and 61 percent respectively.
By comparison, the site saw just over 1,000 transactions in the fourth quarter of 2009.
“As the economy continues to improve, consumer confidence increases, and small businesses continue to gain in market share, you’re going to see more businesses looking to sell,” says Brian Miller, COO of AdviCoach, a national business coaching company. “The best time to sell is when a business is doing well.”
Here are four reasons the small business marketplace is thriving:
1) Prices are good. The median sale price for a small business was up 3 percent year-over-year in the third quarter, the fifth consecutive quarter to show gains.
“During the downturn a lot of potential sellers paused because their business’ valuations were down,” says Andy Cagnetta, CEO of brokerage firm Transworld. “Now that earnings have picked back up, they feel like there’s an opportunity to sell again.” That’s especially good news for business owners who have been wanting to move on from their company for several years now.
Even with recent growth, valuations aren’t quite up to their pre-recession peaks, which means that buyers also feel like they’re getting a good price, especially for businesses that are poised for future growth.
2) Baby Boomers are in transition. The trend also reflects broader demographic shifts in the country. As a growing number of Baby Boomer leave their 9-to-5 jobs in corporate America, many are looking for a “second act” that works with their lifestyle, provides some income, and also offers flexibility. In 1996, just 14 percent of new entrepreneurs were age 55 to 64; last year they made up 23.4 percent of all new entrepreneurs, according to the Ewing Marion Kauffman Foundation.
Experts say that Boomers also represent a growing portion of business sellers as well. Long-time business owners who are ready to retire from the business they’ve run for decades see today’s market as a good time to make an exit.
Such was the case with Levine Communications Office, a Los Angeles-based PR firm sold by founder Michael Levine in April. “The firm has a great track record, and a great reputation, but Michael was ready to move on and do something different,” says David T. Fagan, CEO of Icon Builder Media, who purchased LCO in April. “We met weekly for six months before we settled on a deal.”
3) Banks are starting to lend again. During the throes of the economic downturn, it was difficult to get banks to even talk about small business loans. Even though credit is still tight, qualified buyers are finding loans. In fiscal year 2013, which ended in September for the federal government, the Small Business Administration backed 54,106 loans, up slightly from the previous fiscal year. Small business lending rose 16 percent in September, year-over-year, according to the Thomson Reuters/PayNet Small Business Lending Index, reflecting a continued upward trend.
Determined business buyers are also finding other ways to get cash to bankroll a deal. Holloway used a home equity loan to purchase his bike shop; and the LCO deal was done with seller financing.
4) Private equity is getting into smaller deals. Small businesses with EBITA (annual earnings before interest, taxes, depreciation and amortization) that exceed $2 million may be able to do something that hasn’t done in the past: find a private equity buyer. As returns in stocks and bonds start to look risky, private money is increasingly eyeing smaller deals that promise a better return.
“If you can attract private equity, it’s a uniquely good time to sell,” says Doug Tatum, the Wright Travel Chair of Entrepreneurship at Middle Tennessee State University and an officer at the Association for Corporate Growth. “There’s a lot of money there chasing fewer deals, and they’re coming downhill and looking at smaller companies.”