Sales of small businesses in America continue to rise, according to the latest quarterly update from BizBuySell. Specifically, there were 2,705 closed small business transactions during the second quarter of 2018, a 6.7 percent jump from Q2 2017 and the highest quarterly total since BizBuySell started tracking this data in 2007. Strengthening revenue and profit numbers have been a factor behind the acceleration in transactions in recent years, and 2018’s continued growth has also been helped by tax reform. Specifically, the reports authors said that under the Tax Cuts and Jobs Act, many owners now benefit from a 20 percent deduction for qualified business income, meaning that “if owners choose to re-invest those savings back into their business as early data suggests, the end result will likely be an increasing number of attractive businesses hitting the market.”
Such financial tailwinds have supported the recent gains in asking and sale prices, while the rapid rise in the volume of businesses being put on the market likely has more to do with the aging population, i.e. retiring Baby Boomers. Indeed, more and more Americans who own a small business have reached or are nearing the age at which they will want to stop managing the day-to-day operations of their company. In fact, Boomers still own the majority (53 percent) of the small businesses in America, according to BizBuySell, and nearly 60 percent of surveyed older owners said that they plan to sell their business within the next two years. Apart from age, many owners may also be motivated to sell sooner rather than later in order to avoid the challenges of managing a company during another recession, something which could easily occur within the next decade since the current economic expansion in America, at over 108 months in length, is already one of the longest in U.S. history. Passing on the management responsibilities, along with ownership, to one’s children is another option, but many owners appear likely to instead wind up selling their company to an outsider.
Why so? To help fund retirement, according to an earlier FPA/CNBC study on succession planning which found that more than three-quarters of surveyed small business owners plan on selling their company in order to satisfy 60 percent to 100 percent of their old-age income needs. That is not too surprising since a BMO Wealth Management poll found that an alarming three in four small business owners have less than $100,000 saved for retirement. More importantly, such a large dependence on a single asset could put the financial security of these soon-to-be retirees in a precarious situation should their company not sell for the price they had anticipated (and developed an old-age budget around). Just as stock market investors should diversify the equities they hold in their portfolio, small business owners should aim to diversify their retirement savings vehicles (401(k)s, IRAs, real estate, etc.), and in turn lessen their overall sensitivity to the eventual selling price of their company.
Sources: BizBuySell, J.P. Morgan, FPA, BMO, Paychex, CNBCPost author: Charles Couch