Sales of small businesses in America remain elevated, according to an updated report from BizBuySell. Specifically, there were 2,433 closed small business transactions during the final three months of 2017, a 6 percent decrease from Q3 but still the highest fourth-quarter total since BizBuySell started tracking this data in 2007. Moreover, the number of small business transactions that occurred last year jumped to a new annual record, exceeding the previous all-time high by 27 percent.
The report’s authors attributed 2017’s acceleration in transactions to a variety of factors, such as strengthening revenue and profit numbers, as well as more people looking to buy and sell. The uptick in sellers is in part being driven by the aging U.S. population, i.e. Baby Boomers, because a growing number of older Americans who own a 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, 58 percent of surveyed business brokers associated more than half of their 2017 sales to Baby Boomer owners, and nearly 3 out of 4 brokers said that they expect more Boomer business owners to enter the market in 2018.
Such owners have probably also been motivated by a favorable market that has seen the time it takes for a business to sell fall considerably over the past year, along with an 11 percent jump in the median asking price. Adding to older owners’ increased willingness to sell is likely a desire to avoid the challenges of managing a company during another recession. Indeed, while there are not any warning signs of an imminent recession, some sort of economic downturn occurring within the next decade would not be surprising since the current expansion in America has been going on for more than 102 months, making it the 3rd-longest on record and more than twice the 47-month average.
Further, a CNBC/FPA study found that more than three-quarters (78 percent) 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. 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, etc.), and in turn lessen their overall sensitivity to the eventual selling price of their company.
Sources: BizBuySell, J.P. Morgan, CNBC, FPAPost author: Charles Couch