Small business acquisitions may be down, but they’re certainly not out

The 2022 economy is an unusual one. Rumors of an impending economic recession have been circulating since early spring, inflation is running rampant and housing costs are at an all-time high, yet our 3.5% unemployment rate is the lowest since 1969. Energy prices are recovering and spending is growing alongside rising wages, but the Federal Reserve’s tightening monetary policy threatens to put a damper on economic activity. 

How is this affecting small businesses across the country? By slowing mergers and acquisitions, lowering profits, and making entrepreneurs and business owners a little more risk averse. 

In Q2, small business acquisitions dropped

This year’s market uncertainty, recession risk, inflation and interest rate hikes have had an outsized impact on the day-to-day operations of small businesses, as well as acquisition activity.  

• In Q2 of 2022, acquisitions dropped a full 3% from Q1.
• The median sale price for small businesses dipped 9% quarter-over-quarter, from a median price of $345,000 to $315,000.
• The average cash flow multiple of sold businesses declined 3% quarter-over-quarter.

While these declines represent a slowdown in small business sale price growth and overall acquisitions activity, they come after nearly two years of strong business performance. In Q2, small businesses sold at a median price that was 17% higher than in Q2 of 2019 — before the pandemic. In Q2, the average small business also had stronger financials, 16% higher revenue and 15% higher cash flow. 

These stats show that while market volatility and recession concerns have caused acquisitions activity to dip slightly over the past few months, small businesses remain exceptionally strong compared to just two years ago. 

Rising interest rates make buying a business particularly expensive

While the average financial health of businesses sold in Q2 was higher than in Q1, the median asking price of for-sale businesses declined quarter-over-quarter. This is likely due to the rising cost of capital. As the Federal Reserve raises interest rates month after month, the cost to take out a loan is rising rapidly. In response, some sellers are being forced to lower their list price to make their business more attractive, and buyers are offering less. 

In one survey by BizBuySell, 39% of respondents said interest rate hikes and tightening lending standards changed their ability to secure the financing they needed to buy a business. While this does limit the number of buyers in the market, it also allows buyers with strong financing to get a great deal.

Rising interest rates have had another interesting impact on acquisition activity: Decreasing the amount of time businesses spend on the market. Over the past several months, interest rates have risen remarkably fast. As a result, the average for-sale small business only spent 171 days on the market in Q2, compared to 181 days in Q1. It is likely these business buyers are looking for quick-close deals to lock in the best possible interest rate — before another hike increases the cost of capital. 

SBA loan activity is on the rise

While the overall number of small business acquisitions decreased a bit in Q2, SBA loan activity increased. Over 20,000 SBA 7(a) loans (which can be used for acquiring, expanding or starting a business) totaling $10.75 billion have been issued in the current fiscal year, and the number of small loans under $150,000 has increased year-over-year.  

Traditional lenders may be tightening their standards, requiring larger down payments, and charging higher rates, but SBA loans remain an accessible choice for small business acquisitions. 

A recession may (or may not be!) looming. But this time, it’s different

There’s no question small businesses are feeling the impact of 2022’s recession indicators. But even if we do dip fully into recession territory, there’s a chance this one won’t be all bad news for small businesses. 

According to the Division President and CEO of Gulf Coast Small Business Lending, Nimi Natan, the market’s reaction to this pre-recession is different from reactions we’ve seen in the past. Rather than wild stock swings, significantly reduced spending, and widespread unemployment, we’re seeing nearly full employment, strong spending and continued growth. Why the contrast? The economic cycle and the mergers and acquisitions cycle don’t operate in lockstep. The economy has a major effect on for-sale businesses, but it’s not the only factor to consider. 

Small businesses in the few industries that are experiencing lagging revenue may struggle to find a buyer and a desirable price. They can expect a longer sales timeline, more due diligence, and less favorable terms. But for-sale businesses that still have strong revenue and cash flow, high demand and healthy financial records are still enticing to the small-but-interested pool of qualified buyers. 

Unlike in past downturns, capital is still available for buyers. Businesses remain healthy, demand is strong and consumers are still making purchases. For now, it appears small business acquisition may be down, but certainly isn’t out.  

Want more?

Escalon can help ensure that your accounting, financial records and taxes are accurately done and that they communicate the full value of your business to potential buyers.