Inflation and Interest Rate Hikes Slowed Small Business Acquisitions in 2022

The BizBuySell Insight Report reveals small business acquisitions for 2022 was up 4.7{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} over 2021. Even though the first half of 2022 experienced strong year-over-year (YOY) gains, the surge of inflation and interest rate hikes slowed the momentum in the second half.

Small Business Acquisition in 2022

The transaction numbers since 2020 show a 19{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} gain. However, it is still 7{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} lower than the pre-pandemic levels of 2019. When 2022 started YOY transactions was up by 27{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} in the first quarter, so there was great optimism. But by year-end, the sales of small businesses dropped to 12.7{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} in the fourth quarter.

a rocky financial performance in 2022 was also in great part responsible for the lower transaction numbers resulting in:

Median revenue dropped 11{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} in Q3 from Q2 and rose 3{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} in Q4, finishing 2022 down 2{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} YOY
Median cash flow dropped 3{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} in Q3 from Q2 and remained flat in Q4, finishing 2022 down 1{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} YOY
The average revenue multiple dropped from .67 to .65 and the average cash flow multiple dropped from 2.55 to 2.53
33{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of brokers closed slightly more deals, while 22{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} closed significantly more deals
47{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of brokers attribute the increase to higher buyer demand for thriving businesses
41{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of brokers believed it was due to an increased number of buyers entering the market

Sale Prices and Demand

The median sale price dropped 3{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} to $315,000 as inflation and rising interest rates were delivering noticeable price declines in business values.

When it comes to the revenue of businesses, it has also declined by 2{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} to $650,000 compared to $665,107 in 2021. Cash flow is following suit with a 1{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} decline to $148,765, compared to $150,000 the previous year.

Close to three fourth or  74{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of business owners in the survey say inflation is not easing and another 53{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of owners said rate hikes are negatively impacting their business. This may favor buyers if the same economic conditions continue into 2024. Almost half or 47{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of brokers feel it favors buyers, while only 17{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} feel it still favors sellers.

As for demand, service businesses remain strong accounting for 39{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of all acquisitions. This was up 7{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} over 2021, which exceeds pre-pandemic levels. The service sector also includes healthcare, financial, and other essential services.

With a median price of $300,000, buyers paid more for businesses in this sector. This is an increase of 33{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} from 2019’s pre-pandemic sale price of $225,000. Businesses in this segment had median revenue increases of 3{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} and median cash flow up 3.4{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} YOY.

When it comes to restaurants specifically, the acquisition jumped 20{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} in 2022 following a 6.5{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} gain in 2021. This was after the huge slump of 38{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} in 2020 brought on by the pandemic. Restaurants sold faster, showed stronger financials and sold at higher prices.

According to BizBuySell, “This activity may suggest pent-up demand for restaurant ownership. After nearly two years of struggling to draw in customers, dining out and gathering with friends is becoming popular again.”


2023 and the Market for Selling Businesses

The business-for-sale market has been on the rise recently, but inflation and steep interest rates have slowed this growth, which doesn’t seem to be letting up anytime soon. Even though prices are going up along interest rates, buyers are not discouraged and are still searching for the best opportunities. There is optimism that 2024 will deliver lower interest rates, but that remains to be seen.

When it comes to sellers, 45{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of owners are selling to retire. And 42{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of sellers feel that the country is already in a recession, compared to 48{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of buyers. One-third of both owners and buyers expect to see a recession in 2023.

With the process of selling a business taking six to 12 months to complete, owners looking for a quick sale must prepare early. BizBuySell reports only 53{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} of surveyed owners have an exit plan, and only 58{5c94e41db43f1643af886a760ed785f3e6f3e4efec1ac57b512d948d7f011ae0} know the value of their business. This means close to half of all owners are not prepared.

Sheila Spangler, Certified Business Intermediary at Murphy Business, says, “Hire a professional business intermediary that has the expertise to value and sell your business. If your financial books and records are not in good shape, get those cleaned up first. The business intermediary can advise you on what needs to be done for an easier sales process. Understand that selling your business is not a quick or easy process and many pitfalls can be avoided when you get the right advice and have the right team on your side!”


Image: Envato Elements

This article, “Inflation and Interest Rate Hikes Slowed Small Business Acquisitions in 2022” was first published on Small Business Trends