Credit costs cool small business sales market

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Just as the housing market cooled following the rise in interest rates, so did the market for small business sales.

After five consecutive quarters of year-over-year growth, small business acquisition activity slowed in the third quarter of this year, according to BizBuySell’s Q3 Insight report, which tracks and analyzes corporate deals. for sale in the United States.

And because capital is more expensive now with rising interest rates, selling prices have fallen, experts say.

“Higher interest rates are causing problems for transactions,” says Adam Debussy, senior marketing director at BizBuySell, a San Francisco-based online marketplace.

According to BizBuySell’s report, the number of closed deals reported nationally in the third quarter fell 2% year-over-year to 2,237, and was 4.5% lower than the number reported in the second trimester. Notably, small business asking prices in the third quarter fell 13% year over year and selling prices fell 14%, respectively, in correlation with weaker finances, according to BizBuySell.

These falling numbers suggest that sellers are cutting prices to accommodate buyers who face rising interest rates and higher acquisition costs, according to the report.

Data from Long Island was not available, but local experts say it’s a more “challenging” environment than a year ago.

“It’s a unique time,” says Ken Stein, managing director of Kensington Company & Affiliates in Roslyn Heights, which specializes in mergers, acquisitions and the sale and development of franchises. “It takes longer to get deals funded, but the deals are still coming.”

With fear of recession, lenders are scrutinizing transactions more carefully, and at the same time interest rates are rising, leading to higher loan repayments, he says.

Ken Stein, Managing Director of Kensington Company & Affiliates in Roslyn Heights. Credit: Kensington Company

This can impact how much a potential buyer can borrow to meet loan repayments, he says, noting that the amount they can borrow needs to be less to keep paying “debt service” ( the money needed to repay both the principal and the interest on the loan).

That said, Stein said asking prices were down.

For New York, the median asking price was $350,000 in Q3 2022 compared to $537,000 in Q3 2021 and the median selling price increased from $370,000 in Q3 2021 to $300,000 in Q3 2022, according to data from BizBuySell. The largest category – 41% of transactions – was for service businesses, followed by restaurants at 36%.

Anthony Citrolo, managing partner of The NYBB Group, a Melville-based M&A firm, says “you have to be creative to get a deal done.”

Buyers are concerned about the state of the economy, he said.

“If someone feels there’s more risk that they won’t pay more, they’ll pay less for the company,” Citrolo says.

Anthony Citrolo, managing partner at The NYBB Group, a...

Anthony Citrolo, Managing Partner of NYBB Group, a Melville-based M&A firm. Credit: NYBB Group

To close deals, Debussy says sellers are more open to offering seller financing. This is where the seller would hold a note for part of the payment over a set number of years.

“A normal seller’s financing note is three to five years,” says Citrolo.

It’s a way for the buyer to obtain more affordable financing and “the owner has his skin in the game,” says Debussy.

In this market, sellers may also need to be more flexible with pricing.

Craig Buchstein, co-owner of Sardo’s Pizzeria & Restaurant in Greenlawn, said the pizzeria, formerly Spinelli’s, was “priced to sell” when he and co-owner Jennifer Rock bought it in June.

After 40 years, the previous owners were looking to retire and not renew their lease, he says.

Buchstein said he and his partner knew the area and knew that Greenlawn Plaza, where the pizzeria was located, was a busy mall, which made it attractive.

But the pizzeria needed improvements, in part for why they got a fair price for the business, he says. Buchstein didn’t reveal the sale price, but said he and Rock invested six figures in renovations to modernize the pizzeria.

He said fortunately that with high interest rates, they didn’t have to rely on loans, but self-financed it with the savings of him and his business partner.

Finding labor was the toughest challenge, but they now have enough staff, Buchstein says.

Although the uncertain economy is a concern, he said that “so far the first few months have been good. ”

“We’re happy with the direction, it’s okay,” he said.

Admittedly, restaurants were a bright spot in the third quarter, Debussy says.

The number of restaurants sold rose 14% year-over-year, while service businesses grew 4%, according to BizBuySell.

On Long Island, however, there is still a strong demand for service businesses such as mental health services, employment agencies, vending machines, laundromats and children’s services, as well as franchises and service businesses. distribution and manufacturing,” says Stein.

/ Since COVID hit, many distributors/manufacturers have improved their operations and also obtained COVID relief funds, he says.

One silver lining is even with a downturn, it’s not as bad as the 2008/2009 recession or even the peak of the pandemic, Citrolo says.

“We are cautiously optimistic,” he says. “There will be people who want to be in their own business and sell their business. It is a constant evolution.

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