2015 was a banner year for the small business for-sale market, but if the first few months of 2016 are any indication, activity won't slow down any time soon.
Across the country, small businesses' financial health is improving, sale prices are creeping up and owners are reaching retirement age. Together, this mix of trends and timing has triggered a wave of exits. The number of new businesses up for sale on BizBuySell.com during the first quarter of 2016 increased more than six percent from the same time last year, marking the highest number of listings since 2009.
As covered in the first article in this series, small business owners are cashing out in order to retire, relax and (in some cases) move on to their next business adventure. But who will step in and capitalize on this flooded market?
BizBuySell recently surveyed more than 1,300 prospective small business buyers, getting a glimpse into what today's buyer community looks like, the types of companies they're looking to own, and what's motivating their purchases in the first place. Here are a few themes that emerged:
- Buyers today skew younger and more diverse: If you're looking to buy a small business in 2016, chances are you're a college-educated, middle-aged male. Twenty-two percent of prospective buyers identify as female, and more than half (58%) are college graduates or post-graduate degree holders. Current buyers also skew slightly younger than sellers. Forty-eight percent of buyers are in their 50s and 60s (compared to 54 percent of sellers), and 21 percent are in their 20s and 30s (compared to only 15 percent of sellers).
In terms of ethnicity, today's buyer pool is more mixed than the general U.S. population. 2014 census estimates indicate that 77 percent of Americans identify as Caucasian, somewhat higher than the 70 percent of prospective buyers who do so. Similarly, 12 percent of buyers identify as Asian/Pacific Islander, double the six percent reflected in the census.
- Freedom drives the desire for small business ownership as much, if not more than, earning power: The majority (64%) of small business buyers are already employed full-time and, of this group, almost half work for large organizations. This detail offers some insight into why buyers are dreaming of small business ownership in the first place.
Given how many buyers work full-time, it's no surprise that a similar amount (63%) cite the chance to be their own boss as their top motivation for purchasing a business. Just over half (52%) are driven by the opportunity for better income. Whether or not small business ownership results in higher take-home, however, is still up for debate. Forty-eight percent of prospective buyers report annual household incomes over $100,000 - not far off from the 57 percent of sellers in the same pay scale.
- Buyer preferences are in sync with sellers' supply: Almost half of prospective small business buyers want to finalize a deal in less than a year. A speedy transaction shouldn't be too hard to come by, especially since the price ranges buyers plan to target overlap with how sellers perceive their businesses' worth. Twenty-eight percent of buyers are looking for companies under $100,000, and 29 percent of sellers value their operations in that same range. More than half (53%) of buyers will search in the $100,000-$500,000 price range, where 40 percent of sellers value their businesses.
The alignment between buyers' demands and sellers' supply extends to industries as well. Prospective buyers rank the restaurant sector - which saw a decrease in median asking and sale prices during the first quarter of 2016 - as their preferred vertical for purchasing a small business.
Without insight into potential buyers' backgrounds, motivations and preferences, planning for or timing a small business sale can feel like a shot in the dark. Small business owners contemplating an exit in 2016 will be happy to know that, for the foreseeable future, there are plenty of motivated buyers out there.