Thinking of Buying a Business in 2023? Here's the Market Outlook

Rieva Lesonsky
Fri, 02 Jun 2023 13:57:03 +0000
Buying-business, Buying-a-business

Are you considering buying a business? Then, you may be in luck. According to a survey of business brokers in the latest BizBuySell Insight Report, in the first quarter of 2023 most (42%) think the current market favors business buyers, 29% believe it’s balanced, and 17% feel it favors sellers.

In addition, 38% of business buyers surveyed in BizBuySell’s recent Small Business Survey say they think they can “get good value at a favorable price.” Part of that is driven by “sellers, especially those wanting to secure a nest egg for their retirement, may be more open to negotiating price rather than hold off and risk being in a weaker position.”

Indeed, 28% of business owners admit they are “speeding up their exit timelines,” and 44% are motivated to sell because they want to retire. Another 30% are burnt out, and 21% want to sell their businesses due to economic uncertainty.

Stats for the first quarter of 2023 brought good news. Last year got off to a great start, with the number of transactions up 24% in Q1 and 14% in Q2. And then, the bottom fell out of the market, with a 13% drop in Q4. So, compared to that, the 4.8% increase in Q1 2023 was a very positive sign. Plus, median sales prices increased 1.4% year-over-year in Q1 and 11% from the last quarter of 2022.

While that seems like good news for sellers, Q1 buyers also had reason to celebrate. Businesses sold in Q1 boasted higher median revenues ($700,000, up 6.7% year-over-year) and cash flow ($155,000, up 2.8%)—the “highest levels on record.”

The advantages of buying a business

Although buying an existing business is typically more expensive than starting one from scratch, startups are often riskier, requiring more time and focus. Buying a business has other advantages, including:

An existing loyal customer base—you won’t have to spend money introducing your new business to the market. In your due diligence, you’ll need to make sure that there are plenty of satisfied customers because part of what you’re paying for is customer “goodwill.”

Lists of suppliers, vendors, marketing partners, and other reliable alliances.

If there’s a staff, you’ll be walking into a business full of people with intimate knowledge of how the business works, what customers want, their behavior patterns, and more.

Established marketing programs you can test your new ideas against instead of shooting blind.

Lenders are more apt to finance existing businesses because they have a proven track record. It’s typically difficult for a startup to get a loan.

Revenues and expenses are largely unknown in a startup’s first year, but if you buy an existing business, you’ll have actual financials in hand and be more prepared for your first year of business ownership.

You will have cash flow from day one—unless the business is in dire shape.

As noted above, many experts in the BizBuySell Insight Report expect an increase in businesses-for-sale inventory this year, fueled by millions of baby boomer business owners ready for retirement. But one business broker says he expects more entrepreneurs to put their businesses up for sale this year because they’ve recovered from lower sales during the Covid-19 pandemic and think they can get a better price.

The aftermath of the pandemic has also impacted business buyers. One broker told BizBuySell that the pandemic made “people take a harder look at what they want to do in their working lives,” spurring their transformation from employee to employer.

Future market outlook

As we move forward into the year, the Insight Report says small businesses are “expected to continue facing challenges stemming from inflation and higher interest rates, while the labor market is expected to ease somewhat.”

One business broker surveyed expects good businesses to come on the market since sellers want "to get ahead of any potential recession that will harm their profits and negatively affect valuation.” Plus, according to the report, demand will remain strong as buyers look for new opportunities. And if the “labor market softens, the pool of buyers is also expected to include an influx of corporate refugees seeking business ownership.”

The Small Business Survey backs up this sentiment, with 45% of potential buyers saying they’re “motivated” to buy because “they want to leave the corporate world and be in control of their future.” And, of course, most are looking for stable, recession-resistant businesses to buy.

Seller financing boosts sales

When interest rates are high, increasing acquisition costs for buyers, the Insight Report says, “Sellers need to consider their best option for arriving at a favorable price.” Over 70% of the business brokers surveyed think seller financing helps make the deal more attractive to buyers, especially “if the terms can beat out a bank’s proposed rates.”

One broker noted that seller financing “at slightly lower than market rates” makes a significant difference in both the selling price and swaying buyers considering multiple acquisition opportunities.

When negotiating with the seller, at least ask for financing assistance. As one surveyed brokers said, “There are plenty of buyers. [We hope] sellers see that buyers are motivated and that the sellers are ready to underwrite a deal at any given moment.”