The small business market: Why selling your business now makes sense
December 21, 2023 ⋅ 4 min read
Are you thinking of selling your business but wondering if there might be a better time? For entrepreneurs who hold their businesses close to their chest, the right moment may never seem to arrive. Let's break down why selling now could be a smart move. We'll look at what factors are at play in this seller’s market and what trends we’re seeing with deal structures. We’ll also share why taking first steps now can help you make more money from selling your business, or in some cases, minimize losses.
Understanding today’s business market
According to the International Business Brokers Association Q3 2023 Executive Report, the SMB market consists of two main business types: Main Street (valued at less than $2 million) and Lower-Middle Market (valued at between $2 million and $50 million).
Over the last 10 years, the median multiple for businesses valued under $500,000 hasn’t shifted beyond 2.0X to 2.3X according to Market Pulse surveys, solidifying the favorable conditions for sellers in the Main Street segment.
Changes in how deals work
According to the U.S. Chamber of Commerce’s weekly small business forecast, “small businesses are bullish on increased revenue for next year and generally positive despite high inflation and interest rates.” Traditionally, seller financing involved slightly higher interest rates compared to banks. However, sellers are now offering interest rates 2-3 points lower, facilitating smoother deals for both parties in the current high-interest rate environment.
“Most seller notes sit behind the senior lender. In a low-interest rate environment, seller notes would be 1-2 points higher than the banknote…Now in a high-interest rate environment, that’s flipped: Sellers are offering interest rates 2-3 points lower. It’s a way to drive the value that the seller wants but keep interest down for the buyer over time,” says Brian Stephens of Legacy Venture Group.
The rise of earnouts
Another shift we've noticed amid the post-pandemic uncertainty: more buyers and sellers are leveraging "earnouts." An earnout is a provision guaranteeing owners additional compensation for the achievement of future financial goals, usually noted as a percentage of earnings. In other words, they’re a flexible tool to find a middle ground between what the seller wants and what the buyer expects. While this is not a popular nor necessarily straightforward tool in the market, its use in transactions is increasing. To set clear provisions and make the most of such an agreement, ensure that your business is using the right metrics; earnouts on gross profit rather than revenue (seller’s preference) or cash flow (buyer’s preference) is a happy middle ground for all parties.
Despite earnouts currently trending, about one in five deals happens without any guarantee, demonstrating that there are many different ways to get small business deals done.
Key step: Planning your exit
In an article for the U.S. Chamber of Commerce, writer Jacqueline Medina says, “If a business is doing well, an exit strategy should maximize profits; and if it is struggling, an exit strategy should minimize losses. Having a good exit strategy in practice will ensure business value is not undermined, providing more opportunities to optimize business outcomes.”
It's essential to highlight the importance of crafting an exit plan. Many sellers start their journey without comprehensive exit strategies in place. And the smaller the business, the less likely owners are to plan.
Retirement continues to be the primary motive for selling across all sectors. Other reasons include:
A better business opportunity has come along: Are you free to pursue it?
Burnout: You’ve given your business all you’ve got, and it’s time for someone with reset energy to take over.
Unsolicited offers: Motivated business buyers have a way of finding you, just like the homebuyer or realtor who pops a postcard in your mailbox even though your home’s off-market.
Health and family: Many small business owners step away to take care of their health or to care for a loved one.
Being ready for any of the above scenarios starts with learning how much your business is worth. Providing a free and accurate valuation is the first step in selling with Baton. Learn more about our selling process here.
Why act now?
Even though retiring is the top reason for selling, not having a clear plan is a universal issue. Planning and understanding and understanding how deals work can help you sell your business better.
Final thoughts: The time is right
The market is in a good place for sellers who understand it. Selling your business isn't just about unloading a burden; it's about getting due compensation for your hard work. The Baton Team is here to talk you through it. Read about who we are and how we help.