COVID-19 Stalls Q1 Transactions; Presents Once in a Lifetime Opportunity for Acquisitions
1st Quarter 2020 Report courtesy of bizbuysell.com.
When calendars flipped to January 1st 2020, all indicators pointed to another active quarter in the business-for-sale market. Despite US-China tariffs occupying headlines, the health of the small business sector hit all-time highs in 2019. A combination of record financials, available affordable financing and retiring Baby Boomers created a robust mix of supply and demand, resulting in a third straight year of a historically strong market. In fact, the year ended with transactions up 2.3% in Q4 2019 versus Q4 2018.
That story continued for the first 63 days of the year, with small business transactions in line year-over-year according to BizBuySell's Q1 Insight Report, a nationally-recognized economic indicator which aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide. The following Monday, March 9th, the stock market suffered its worst day since the Great Recession, causing panic about the financial climate and jolting the economy. The same week, President Trump declared a national emergency while the Center for Disease Control recommended limiting gathering of 50 people or more in the U.S.
Finally, on March 16th, California Governor Gavin Newsom announced the country's first statewide shelter-in-place order, forcing all but 16 critical infrastructure sectors to close their doors. By the end of March, 30 states had mandated social distancing orders. Over the final 26 days of March, the number of reported sold businesses dipped 43% year-over-year. Whether these deals were delayed or simply not yet reported as brokers scrambled to put their own business plans in place remains to be seen.
The tale of two quarters resulted in an overall 11% dip in Q1 transactions versus the year prior, down to 2,225 from 2,504. However, the financial performance of sold businesses increased year-over-year, with median cash flow up 10.9% and median revenue up 11.1% to $129,548 and $600,000 respectively. The higher financials had a direct correlation to sale prices, which also rose 11.1% to $250,000.
Since the initial shock, the federal government quickly approved several relief acts aimed at helping support small business. Perhaps the most significant for the business-for-sale market is the Small Business Administration Debt Relief Program. Under the program, the SBA will pay the first six principal and interest payments on behalf of the borrower for SBA 7a loans. This payment is made as a subsidy and not a deferment (meaning there is no obligation for repayment) and is eligible for all existing 7a loans and new 7a loans closing between March 27th and September 27th, 2020.
For business buyers, the SBA Debt Relief Program translates to six months of zero cost P&I. Factor in historically low interest rates and you have acquisition costs considerably lower than even 3 months ago. A buyer that gets approved for a SBA 7a acquisition loan that closes before September 27 th can receive this limited time and significant benefit.
"This is the opportunity of a lifetime for a well-positioned buyer," said Tony Calvacca, managing partner of The NYBB Group. "And if you already operate a solid, sustainable business, there is never going to be a better opportunity to grow your volume exponentially. This is especially true for B2B companies or those in the service sector where demand is going to be constant." Calvacca specifically mentions HVAC companies as a robust opportunity, "When summer rolls around, you can bet people will pay to not bake in their living room."
Of course some sectors are going to have more challenges when it comes to selling in today's climate, with those locations facing government imposed shut downs having the most questions marks. For those owners, Calvacca says hyper-negotiating lease terms and other business costs can be a great way to add value.
"Landlords don't want to lose tenants, so they're willing to negotiate on mutually beneficial lease terms," says Calvacca. "If you can work out multi-year, low cost lease terms, buyers ready to withstand the storm will pay a premium to acquire you. For buyers it's all about managing risk, and in this scenario the risk is offset by the advantage they'll have once things rebound. Many popular brands are expanding this way, and at the same time, owners are able to sell their business even though it's technically closed."
Matt Coletta, Co-Founder and Managing Partner of California based M&A Business Advisors, says creativity and making sure all parties involved in a transaction are flexible will be the key going forward this year.
"Everyone has to cooperate, and you have to be creative now in order to make deals and minimize the buyer's risk in this environment. This applies to both smaller Main Street businesses and those businesses selling for excess of $1 million," says Coletta. "I closed a transaction last week that only happened because the seller, buyer, landlord and I collaborated and came up with fair terms to minimize the buyer's risk so that we could move forward and close."
Coletta also echoes Calvacca's sentiment on opportunity. "If buyers are willing to take the leap on buying a business in the near future, they will be in a great position to purchase at a discount and put a favorable long-term lease in place."
A leap on buying is a very accurate description for many businesses in wake of COVID-19. According to BizBuySell's April 2nd survey of business owners, 78% reported a decline in customer demand as a result of the coronavirus pandemic. Even businesses deemed essential or able to stay open may feel the effects. "My coffee shop is inside a hotel. The hotel lost much of their registered guests and events/conferences due to the lockdowns," said Scot A. Munns of Dark Shot Coffee in Nevada. "I am still open as take-out, but not near the level of business I have had."
While it's unreasonable to believe all of these businesses will survive the pandemic fallout, as Calvacca puts it, "If you can make it through the fire, you're going to really do well."