2020 was a year of uncertainty for business sellers and buyers. When the COVID-19 pandemic hit in March and stay-at-home orders were put into effect no one knew what the impact would be. Essential businesses were able to stay open, many others closed. The recovery since then has been very uneven. According to BizBuySell’s January 2021 survey of small business owners, 52% are still experiencing reduced demand. 25% are unaffected by the pandemic and 23% report an increase in customers.
52% of businesses are still experiencing reduced demand
What does 2021 hold? Any businesses that either maintained normal business operations, closed for a short time and bounced back, or grew during the pandemic will have buyers interested in them. Buyers are going to look for businesses that were pandemic resistant. According to BizBuySell.com a premium of about 6% was paid on businesses that were pandemic resistant in Q3 2020. By the end of 2020 the the median sales price of businesses sold rose 12%.
The median sales price of businesses sold rose 12% in 2020
If that trend continues, will it continue to drive up the value of small businesses? It is hard to say. Interest rates look like they will be held near historical lows by the Federal Reserve. Cheap money typically leads to more selling and buying. Some SBA Lenders are offering 10-year fixed rates at 5%. A buyer could potentially purchase a $300,000 business for 10% down and have payments of $35,000 annually. If you buy a business that has $150,000 in cash flow, that is a good return on your investment. The only problem is that we do not know how confident buyers will be in 2021.
Existing business owners may look at the opportunity to go out and bargain hunt for businesses and grow through acquisition. How many new buyers will jump into the market? According to BizBuySell’s survey 21% of buyers identified as new unemployed and 36% were unhappy with their current jobs. I think you will see many buyers putting their toes in the water to see what is available, but may not pull the trigger until Q2 or Q3.
21% of buyers identify as newly unemployed with an additional 35% unhappy with their job
Another variable in the equation is how the new Corona Virus Stimulus Package will affect business transactions. Initial reports say that there will be some great incentives to buyers that take out an SBA Loan. They may include the following:
- The SBA is waiving the guarantee fee to all borrowers until 9/30/21. For loans over $150,000, this fee ranged from 3% to 3.75% of the guaranteed amount.
- The SBA Principal and Interest Subsidy for new borrowers is back! The SBA will pay for six months of principal and interest (up to $9,000 per month) for loans in the pipeline or approved between 2/1/2021 and 9/30/2021.
- Section 278 (C) makes these subsidy payments not taxable.
- The SBA will now guarantee to lenders 90% of the loan, up from 75%. Note, this does not change the down payment requirements but reduces the amount of risk the lender holds with the loan, potentially enabling loans to qualify that might not otherwise have.
This could stimulate seller and buyer activity. Talk to your SBA lender to find out more. You can find more information here: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
What is going to happen in 2021? We still don’t know. I remain cautiously optimistic.
Sources and thanks to:
BizBuySell, January 21, 2021 https://www.bizbuysell.com/news/bizbuysell-2020-fourth-quarter-insight-report
Steve Mariani, Diamond Financial: Major Updates to SBA Included in Stimulus Bill – Diamond Financial (diamondfs.com)