Sales of small businesses in America continue to rise, according to an updated report from BizBuySell. Specifically, there were 2,090 closed small business transactions in the third quarter of 2016, a 15.2 percent spike compared to Q3 2015 and an all-time high for quarterly transactions. That strong gain also lifted the year-to-date total for small business sales to 5,865, which kept 2016 on track for a record-breaking pace of annual transactions. Further, sales have surged by 75.8 percent over the past four years due in large part to the aging U.S. population, i.e. Baby Boomers, with many older Americans who own their own business nearing the age at which they will want to stop managing the day-to-day operations of their company.
Such owners have likely also been motivated by a favorable market for sellers that has seen the median small business transaction price rise by 7.6 percent in just the past twelve months, according to BizBuySell data. Asking prices, though, have fallen closer to transaction prices recently, suggesting that owners may be more motivated to sell. That is not too surprising since the current economic expansion in America is the 4th-longest since 1949, and many analysts believe that a recession is likely within the next four years. Moreover, many older small business owners probably want to avoid the challenges of managing their company during another downturn and would also prefer to sell now before the value of their firm potentially drops. The latter is especially important since an alarming number of small business owners are ill-prepared for retirement and will likely have to depend a lot of the selling value of their company in old age.
Just look at the new study from BMO Wealth Management which found that 68 percent of surveyed small business owners ages 45 to 64 said that they have less than $100,000 set aside for retirement, and only 11 percent reported having more than $500,000 saved away. More than three-quarters (77 percent) of all respondents indicated that they draw out less than $50,000 from their business annually to cover regular personal expenses but that still means, according to BMO estimates, that most owners who want to maintain their current lifestyle in retirement would likely only be able to do so for a short period of time. Selling their small businesses could bring in additional funds but such a large dependence on a single asset could put the financial security of these retirees in a precarious situation should their company not sell for the price they had anticipated. Just as retail investors must diversify the stocks they hold in their portfolio, small business owners should aim to diversify their retirement savings vehicles (401(k)s, IRAs, etc.) and in turn lessen their overall sensitivity to the eventual selling price of their company.
Sources: BizBuySell, Wall Street Journal, BMO Wealth ManagementPost author: Charles Couch