EP 95: Q2 Market Insights from BizBuySell

Please welcome please welcome welcome. This is another episode of the defenders of business value podcast podcast where we talk about what makes a business valuable. They're into tips and tactics to increase your company's value that only veteran dealmakers know. And now, here's your host it my soul clan. Welcome to another episode of defenders of business value. I'm your host, Ed Mysogland. This episode is going to be a little bit shorter, but it's packed with information. A lot of a lot of you have reached out and have provided feedback that you know what you really enjoy hearing about market analysis, what's going on in the market, not only, you know, while our guests are certainly informative, a lot of the sellers that we work with want to talk about, you know, tell me something more about the market. So about a month, month and a half ago, I did DL stat, which is one of the largest market data databases on the planet. And this week, I'm going to do bizbuysell. So bizbuysell, for those of you don't know is the largest marketplace of business sales as far as bricks and mortar. You're small analysts and Mark micro businesses, but probably Sub Sub 15 million in revenue and below. And so each quarter biz Buy Sell releases, what they call the Best Buy Sell insight report. So that's what I'm going to share with you today is they recently released the results from quarter number two. So the first thing I guess we should talk about is the high level, what are the things that that have transpired? So the first thing is that business transactions have increased, you know, 8% for versus this quarter, so 2023 versus 2022. So second quarter, were up 8%. Now, to put that into context, so business biz buy sell, sells roughly 10,000 businesses a year, or the brokers or brokers that post there, the businesses there, it's about 10,000. And from there, and that's off of listing number of between, I believe last last we heard it was between 50 and 55,000 businesses. So again, you know, it's a dismal success ratio, but yeah, roughly 20%. But nevertheless, you know, there's 20% of those businesses that are selling and in this case, it was 8%. Year over year. Okay, so. So what was interesting is that there was a 14% drop in prices. All right, and I, and we'll talk about it here in a second a little bit more in detail. But that was a big telling issue. And the issue has to do with predominantly cost of capital, meaning that it costs due to inflation and the Fed increasing the, the rates it, it creates a challenge. And as a result, we're seeing we're seeing that price, the valuations drop. Interesting. The next thing is interesting that the restaurants have regained popularity, and you know, I don't I don't think restaurants ever really changed. I mean, COVID certainly did a number on him. But But aside if you if you eliminate if you eliminate the COVID yours to me, by the way, this is just EDS, eds. Opinion is I believe that COVID actually helped restaurants, those that that pit were able to pivot move into delivery, ghost kitchens, things like that. I really think that they, they're thriving. So and I think we saw that in with COVID that either they did, you know, just okay, or they totally did great. And so, so while they were saying you know, restaurants are regaining popularity. i And again, my opinion, I don't believe that it necessarily. I don't, I don't believe that it has ever really gone away. I just believe that COVID is in the rearview mirror. I say that COVID COVID starting to rage right now, but but restaurants in general, they're still they're still there. It just happens to be that people are now buying them because, you know, we're far enough away from the pandemic that they can see how the financial results actually are. Lastly, the last key point was that baby boomers continue to pass the keys to corporate refugees. And that's, that's I'm quoting from the from the insight report. And we're seeing the same, we're seeing that there's a lot of people that either not necessarily have been displaced, but those that want to, you know, to have a greater control of their destiny, those that have left the corporate workplace, they're looking at buying businesses. So, so that's consistent with what we see here in our practice. So let's go a little bit further into into the insight report. So the first thing is, you know, the second quarter acquisitions climbed by 8%. All right, and and that was quarter over quarter, which was a 4.8%. Gain over the first quarter. Again, I, I think, what we're, I think you're seeing a lot of 2022 year end, that got kicked into 23. And I believe that, you know, there's, once you pass a threshold, like a year end, everybody pumps, every buyer pumps the brakes, and they want to take a look at, okay, what is what did year end look like? And chances are, there was some retraining, there was no adjustment in purchase price and good or bad, but nevertheless, I believe that's what led to the increase in, in, and why there was an increase in total acquisitions. So, back to value, though, the medium price dropped by 14%. And, again, you know, you know, probably, you know, a year year and a half ago, I mean, we're talking, we're at 5%. Money, as far as borrowing money, five 6%. Now, we're bumping up to 11%. That's that, that, to me, is why the prices are dropping. And so we're seeing that, you know, there is there is a challenge as it relates to the, to how much money you can borrow, it's not necessarily the, the value of the company has changed. It's just your borrowing power has. So. So what do you do, you've got to be creative, if you're on the sell side, it's, it's now a new, anticipate that there's going to be some creative financing, maybe that's a subordinated seller, promissory note, maybe that's a, an earnout maybe that's a self cancelling note, things like that, where you're bridging the gap of have out that value gap. And so, I, again, this is, for those of us that have been in business for as long as we have, and in our case, it's 41 years, and I've been in, in my role 31 of those 41. You know, it's, I don't wanna say it's business as usual. But that's what we do is we come up with structure and, and, and a means for business owners to exit, while at the same time helping the buyer create a deal that is, has mitigated as much risk as we can. So both buyer and seller are getting the best deal from both ends. Okay, so now, let's talk a little bit about seller financing. Now that seller financing has always has always been a component of most deals. And when I say that, in small business land, we don't have a whole lot of businesses that have audited financial statements where there's an assurance of, of the financial condition, you know, you'll see, you'll see reviews, you'll see compilations, but that's really about it.

And so what creates the problem is, if I'm a buyer, I want some assurances that those earnings will continue to be there. Number one, are they there? And number two, are they going to continue? And that's back to business value. So there's three components to business value. And I've said this 100 times, it's about earnings. It's about growth, and it's about expectation, those are the three components to making valuation work. And when we start talking about, you know, seller financing, a lot of that is, is a MISC is a risk mitigating tool for the buyer. And so what we're seeing is, is that there's the buyer, and again, this could be part of the tail end of COVID, where there was some volatility, certainly there is volatility. And now, the question is, when you came out of the gate after the pandemic, is that proxy for what's going to happen going forward, or, you know, what is the new normal for you. So, this Buy Sell had had surveyed buyers, and 43% of them tend to use the SBA. And then and then 70% intend to intend on asking the seller to finance part of the deal. That to me is not a surprise. And so part of the problem we we tend to bump into is our sellers, our sellers, you know, they think that they should, they, meaning buyers should just automatically take their word for it, and move down the road, it's not that simple. And we continue to bump into that problem, where I should get all cash at closing, well, you're not providing the assurance that the buyer needs in order for that to happen. So we're so most sellers, and in this case, you know, only 22% of sellers, plan to offer seller financing. Those are the those are the types of sellers, that are probably going to be stuck with their business, if they don't cooperate with the buyer, and the primary lending the lending vehicle in or whether that's the SBA, or conventional financing, those are problems. But seller financing has always been a key component to every business sale. Okay, so now let's move to restaurants, restaurants, they're going up, I mean, 10% transactions Rose 10.3%, over the previous over the previous quarter of 3.2%. And so it's interesting that more people are getting into them. Now, having been in the business, as long as I have, I can tell you that there's a lot of people that buy restaurants that probably have no business buying a restaurant. And the reason, the reason I say that is people just assume it's a simple business, I mean, all you do is hand people food, or you prepare it and, and they, they, they totally underestimate the complexity that goes into running a restaurant. And I would submit that a restaurant, and whether that includes liquor doesn't include liquor, I will submit to you that that, to me, that is probably as complicated of a business as manufacturing, and manufacturing people will be mad, but nevertheless, there's a lot of moving parts in that restaurant, that the business the business buyer, at initially doesn't, doesn't fully understand. So as we look at this, you know, we're seeing, we're seeing an increase in a restaurant transactions. Alright, so a lot of a lot of the business sellers that are in the restaurant business, are sitting here saying, Okay, I survived COVID. I want out. And, and we're so we're seeing a lot of of that kind of turnover. So restaurants are part of that retail sector. I mean, it's, theoretically it all falls into retail, whether you're talking to restaurant or an actual retail business. What's interesting is that retail businesses as a whole shouldn't be surprising. It's declining. Now, if you if you're listening to this and you own a retail business, it's like, okay, well, what am I what am I supposed to do now? Well, okay, so the businesses, you know, what we're seeing is that, you know, if you have a niche, it's one thing, if you're competing head to head with with Amazon, and you don't have a some sort of means to offer that service or some something that Amazon can't provide. It's going to be a tough road for you to sell it just it just is because no one wants to fight that the the, the behemoth in the industry. So as we look at the retail subcomponent, I think what we have to keep in mind is, you know, it's, it's going to go down and up and the volatility of the retail sector, you know, just the bricks and mortar type retail stores, it creates a challenge and, and work and the people that we're consulting right now, from a retail standpoint, it's what makes the most sense can you get can we get anybody to recognize the goodwill in the business or is the goodwill going to evaporate quicker than we anticipate and and How do you facilitate that, I mean, there's different, there's certainly different ways the, a lot of retail businesses are probably best suited to doing a going out of business sale that takes first take six months, and they continue to bring in new inventory. And they tend to, to make out better. And we're, we're, we're planning a, an episode all around that here in the next month or so. The second kind is, you know, lending, you don't get the kind of collateral value you get, that you historically have gotten. And So therein lies where we have another need to bridge the the gap, the value gap, by using seller financing, so we're hoping we can get, we're hoping we can get credit for Goodwill, we know there's gonna be a shortcoming of collateral using the inventory. And as far as the tangible tangible assets, you know, the fixtures and, and shelving and stuff, it's just, there's just not a whole lot of value there. Okay, so now we move into the, we move into buyers. And this has been, you know, as I read this report, I mean, anytime there's a bump in the economic road, we see the same thing, there's a there's somewhat of an exodus and our buyer pool increases with business owners, or prospective business owners that want to take control of their, of the of their life, you know, of their professional life. And so we're seeing a lot of a lot of those, a lot of those types of buyers that are, I think they reference corporate refugees, same kind of thing everybody is, is, it might be easier to control my own destiny than to hope I don't get displaced by the man. And there's, that's been going on for forever in a day, I do believe that the buyer pool continue to broaden. As far as we haven't, we have not seen any change in in the decrease of reasons for sale, the primary reason people are selling is retirement. And I don't foresee that to not be number one for at least the next three to five years. Okay, so as we move into rates, you know, it's
Yeah, at the time of this recording, I mean, it, it's going for 1111 and a half percent money, and that, that just beats up deals, it just does it just the cost of capital is is, is really aggressive. And it's hard for, for all the pieces to fit, where the seller is maximizing their value, the buyer is able to have a capital structure, where they're able to make the kind of money that they made, when they left corporate America, service the debt and get her get a return of an on that investment. Those are the three components that they're looking to get and, and when you're when you increase the cost of capital, that debt service really goes up and start to eating into the compensation that that business or business buyer is trying to, you know, trying to to have. And as a result, you see that you can't afford as much business as you used to do. So what does that mean? Well, I typically, you know, if there's a new administration, regardless of what side of the aisle, I do think that you're gonna see that the rates will decrease. I don't think we're going to see them at 5% anytime soon. But nevertheless, I do think that they're going to decrease and, and, you know, we should be able to be in a position to, to fix a lot of value gap that we have been experiencing. The other thing, one of the, this is on a side note, one of the things that that we're, we've been advising our clients to do is to do say, you know, one or two year note with a balloon, a balloon or or a condition to refinance. And that's not a bad, a bad way to go. Now, the second thing is for those of you who have idle loans, you know, idle ei D L, the Federal those companies, you know, you got PPP money for, for employee retention and then you have Had you had the economic disaster relief. So the idle loan, that's 3% 30 year money, that's assumable. So if you have an idle loan hanging out there, it, it may solve some of your cost of capital problems. So look into look into that, that's a good, a good way to bridge that value gap. All right, the last, the last thing is, as we come into third and fourth quarter, now, it's still a good time it is it is as good a time to sell and it's as good a time to buy as it ever has been. And for me, I don't believe that buyers are necessarily taking it on the chin nor sellers, I do believe that there's collectively that were businesses overpriced, I don't know, the market is the market, I have no idea whether that's the case, I can tell you market multiples, they just change. They just changed slightly now. But earnings are what drives value. So So as I look at at those types of businesses across our portfolio, to me, I believe that we're, we're still in a great, great time for for the for good deals to be to be made by both the buyer and seller. And as always, if there is anything on our end that we can help, I will tell you when I have to turn on the meter. The door is always open. We've been doing it for 40 years. And you know, we're we're happy to help in any way. So I hope you enjoyed this episode about Best Buy Sell market insights, and we look forward to talking to you next week. This was another episode of the defenders of business value podcasts are more episodes packed with strategies to increase the value of your business visit defenders of business value.com For shownotes transcripts and free tools to start you on your journey. Subscribe now so you don't miss any future episodes.