There are a number of important metrics that measure the health of the small business for-sale market. Deal volume, sale price, and cash flow multiples are traditional, go-to metrics for gauging small business sales, but they're not the only useful indicators.
A less reported but very telling way to track the market is analyzing the time required to sell a business, which reflects both demand among would-be buyers and the expectations of sellers. A recent BizBuySell analysis of small businesses sold from 2007 through 2014 revealed that business sale times often parallel broader changes in the economy, and offer useful insight into the current state of small-business transactions.
Tracking the Economy
According to BizBuySell's time-to-sell data, business sale times remained relatively consistent from 2007 to 2010, despite the prolonged recession. From Q3 2010 to Q2 2012, however, sale cycles dragged on significantly: The median sale time rose 22 percent, to 200 days.
The lagging sales times were likely due to a shortage of qualified buyers in the market during the economic recovery. Struggling with poor personal finances and scarce access to capital, many entrepreneurs likely delayed or abandoned their purchases, forcing sellers to spend more time identifying (or waiting around for) potential buyers.
2012: A Dramatic Turning Point
Since early 2012, the median business sale time has dropped steadily to some of the shortest on record. The median business sale cycle lasted only 153 days in Q4 2014, 13 percent lower than the year before, and the lowest of any quarter since BizBuySell began tracking sale times in 2007.
As the national and global economies found their footing, business buyers' personal wealth and appetite for new ventures did too. Between relaxed lending policies, a rise in financing options, and a booming stock market, many buyers now have the capital to seriously contemplate purchasing a business. The buyer pool is also wider and more diverse than ever before, with an uptick of interested Millennials and minorities helping to facilitate faster sales.
"Lenders are facing more competition, so they have bolstered their customer service and speed to lending", reports Andy Cagnetta, CEO of Transworld Business Advisors, a leading business-brokerage firm. "Buyers are competing for good deals more than ever, and private equity needs to get pent up money to work. Therefore, deals are being snatched up more quickly than in the past few years", Cagnetta says.
Where Do We Go from Here?
It's impossible to identify a single change or event that's driving faster business sales, but the steadily improving economy has had a leading role in simplifying the transaction process. During the depths of the recession and even the recovery, the demand for small businesses was weak, and capable buyers were hard to come by. For-sale listings sat for months untouched, as owners waited for the chance to exit. Few were in the financial or risk-taking position to finalize a deal.
In terms of the foreseeable future, it's likely that the short-sale trend will hold, if not drop even further. There have been few social or economic fluctuations that would indicate otherwise. For sellers anxious to exit their small businesses and move on to the next chapter, or buyers itching for a new opportunity, there's no better time than the present.