The second quarter of 2020 began with government-mandated shutdowns, disruption, and uncertainty, as small businesses faced new restrictions to prevent the spread of Covid-19. Business buyers paused their search, deals were postponed, and transactions dropped 39 percent, according to BizBuySell's Insight Report on the small-business market.
By the end of the quarter, the dust had settled and new trends in consumer activity had emerged. Entrepreneurs adjusted their strategy and acquisitions began steadily bouncing back. Given the various forces at play, combined with the Cares Act stimulus loan program, business buyers have been presented with some unique opportunities.
Low-Risk, High-Performing Essential Businesses
While many small businesses have been struggling in the face of this pandemic, those deemed essential have continued to receive a steady stream of customers, and many have even thrived. Consumer behavior has shifted, fueling demand for their products and services. Businesses we rely upon for our everyday needs, such as grocery stores, liquor stores, medical and health care businesses, and auto repair shops, continue to perform well. Others, such as cleaning services, IT services, quick-service restaurants, and logistics services, have seen business skyrocket. For buyers looking for stability in uncertain times, or even emerging growth opportunities, these businesses are very attractive.
Even in the midst of a pandemic, BizBuySell data shows that the financials of sold businesses during Q2 2020 held steady. The median revenue declined an insignificant 0.2 percent, while the median cash flow increased 5.6 percent. Furthermore, these high-performing businesses hold value. This is driven by two factors: 1) the low risk in reliable cash flow, and 2) the lower availability of these types of resilient businesses on the market.
Buying a business that is profitable during the pandemic might mean paying a premium for the reduced risk. In fact, the median sale price of businesses sold in Q2 rose 6.1 percent compared with 2019, from $270,000 to $286,500.
Alison Hall, owner of a UPS store in Pennsylvania, observes, "If anything, the last few months has made my business more marketable." When faced with the task of identifying essential businesses, it can be easy to stop at grocery stores, cleaning services, and health care services. Challenge yourself to think outside the box to meet the needs of consumers.
Buying the Dip Through Distressed Businesses
Buyers seeking lower prices can achieve business ownership by acquiring distressed businesses. According to a recent BizBuySell study, at the right value, 59 percent of buyers would consider buying a business closed because of the pandemic. Buyers in the restaurant sector may be in the best position to take advantage of this, as the pandemic is leaving thousands of fully built-out closed restaurants available for purchase.
Buying a distressed business requires knowing how to manage risk. Buyers looking to find value in a distressed business should search for one at a low price and invest time and energy into making it successful. According to BizBuySell's survey, 68 percent of owners experiencing a decline expect their companies to rebound within the next year. Buyers committed to buying a distressed business should keep this timeline in mind when evaluating how much cash flow is necessary to sustain operations as demand returns to normal.
Asset Sales Provide an Opportunity to Secure Prime Commercial Real Estate
Businesses sold as asset sales present a rare opportunity for buyers to secure coveted real estate in prime locations, allowing for growth and expansion. They also offer valuable material assets in the form of leasehold improvements, FF&E, inventory, and transferable permits and licenses, saving buyers substantial amounts of money. Asset sales can be purchased without having to pay for the historical cash flow a business would generate under normal circumstances. According to Andy Kocemba, president and CEO of Calhoun Companies, some owners will be forced to sell specifically to exit the lease. Kocemba concludes, "In these cases, you're essentially helping them sell their assets only."
More Opportunities Expected in the Pipeline as Market Uncertainty Continues
As the coronavirus pandemic remains a major influence over the small-business economy, business buyers can expect to find an interesting mix of both high-performing and distressed businesses, as well as asset sales. Baby Boomers nearing retirement and facing economic volatility will continue to supply the market, with some owners exiting thriving businesses and receiving premium prices, and others liquidating in hopes of getting out before rent is due.
To navigate this market volatility, buyers should do plenty of research, including talking to experienced business brokers, before deciding on a plan of action. Consider the various things each of these types of businesses offer business buyers: essential businesses, distressed businesses, and asset sales, to find opportunities that are surfacing during this time.
Correction: An earlier version of this column used the wrong first name of Andy Kocemba, president and CEO of Calhoun Companies.