A strong market and a new year have made for near perfect buying conditions. And for small business entrepreneurs, an influx of profitable, quality businesses for sale can be an exciting prospect -- but one that still requires diligent research and planning.
While the current market is a goldmine of financially healthy businesses, their profitability comes with many variables. Before jumping into a purchase, it is important that buyers ensure that everything from the asking price to the existing infrastructure is setting them up for continued success. Buyers need to make sure that there is real value in the business that they are pursuing -- considering the business investment they are making.
As savvy as today's buyer is, there is always the possibility that changing market conditions could impact the price, profitability and financing of the sale. For an inside look at the state of the market, we asked a panel of small business experts what they believe buyers should be made aware of in 2019. Here's what they said to keep in mind:
1. SBA Loans & Interest Rates
SBA loans, a primary means of financing, are trending in buyers' favor. "SBA lending has never been friendlier and more accessible," says Andrew Cagnetta, CEO of Transworld Business Advisors. The SBA is aggressively funding loans for quality businesses with strong financials and qualified buyers. However, while these SBA loans have lower down payments and flexible overhead requirements, interest rates across the board have the potential to increase.
The Federal Funds rate is projected to reach 3.1 percent by the end of 2019, which is significant percentage increase from 2018's end-of-year rate of 2.4 percent. Historically, when the government raises their interest rates, banks follow suit. As these rates continue to climb (projected to reach 3.4 by the end of 2020), buyers should weigh their options and those with the adequate financing may want to consider traditional term loans, which generally have lower interest rates than SBA loans.
2. Baby Boomers
Baby boomers are fueling the market with a selection of profitable businesses that have strong financial footing. In a recent survey, 67 percent of baby boomer business owners say that their business is currently profiting. This presents buyers with opportunities to buy or acquire quality, profitable add-ons to their existing portfolios.
"More and more quality businesses are coming to market from the upper end of the baby boomers [65 and older] looking to sell," says Matt Coletta, co-founder and managing partner at M&A Business Advisors. This means that the volume of attractive business opportunities for entrepreneurs will only increase. Beyond 2019, it's projected that this number will continue to rise as the rest of the baby boomers reach retirement -- with more than 70 percent of baby boomer-held businesses expected to sell or change hands in the next 10 to 15 years.
3. Low Unemployment
While a healthy market with competitive pricing is encouraging, the low unemployment rate indicates a depleting pool of available workers. For small businesses, it's becoming difficult to compete with the pay and benefits offered by larger corporations.
"Labor, occupancy and other operating costs will continue to increase and negatively impact profits," projects Steve Zimmerman, CEO and principal broker of the Restaurant Realty Company. This intensified competition for job candidates has negative implications for the year ahead. Before buying, considerations for labor, housing, commutability and competition should be part of the conversation.
The number of quality businesses entering the market is rising, and with it, buyer optimism. Today's small business buyers are careful not to let heightened optimism create a false sense of security and are doing their due diligence to justify purchases.
"Buyers are doing their homework to see what similar businesses are selling for," says Coletta."They are more educated than ever in determining value and with the process of purchasing a business."
Beyond what has already been mentioned by our experts, elections, trade negotiations and economic volatility all have the capacity to impact small business prices dramatically. So, as a buyer, it's a best practice to keep an eye on what's trending in the news and what has the potential to change in the market. In this way, buyers can be sure that, in 2019, their first step into small business ownership is a smart one.