The Washington Post recently reported that a record number of small businesses were sold in 2016. According to a recent study by BizBuySell, a total of 7,842 small businesses were sold in 2016, which represents the highest total since 2007 when the earliest data was available.
As a CFO consulting service for a wide variety of small businesses, we have also been a part of this increasing trend.
Some of the key reasons cited for the high number of small businesses bought and sold include:
Companies that were sold had grown their revenues (+5.2%) and cash flow (+5.4%) over the previous year.
Having stronger financials due to sales growth, increased profits and cash flow led to higher valuations for small business. The average sales price was up almost 3% in the 4th quarter of 2016.
Many small business owners who sold were older baby boomers who are looking to retire.
Conversely, there is an increasing number of business acquirers who are millennials looking for a new business opportunity.
Interest rates (i.e., the cost of capital) remain at very low levels, which makes it easier for acquirers to buy businesses.
For small businesses here in the San Francisco Bay Area and Silicon Valley, the valuations of the companies sold were higher than the national average based on either a Price / Revenues or a Price / Cash Flow multiple.