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Small Business Buyers Are Calling the Shots

selling business . / Credit: For Sale Image via Shutterstock

Right now may be the perfect time for individuals to get into business on their own, new research reveals.

Overall, 78 percent of brokers selling businesses valued from $500,000 to $2 million say the current market favors buyers. However, the market changes dramatically as the costs of businesses rise. Buyers and sellers are split over who has the advantage among businesses costing between $2 million and $5 million. Sixty-five percent of respondents say it is a seller's market for businesses between $5 million to $50 million.      

"As our economy picks up steam, more high-net worth individuals are transitioning from employees to business owners," said George Lanza, president of Plethora Businesses, an online business sales marketplace. "Many of these individuals are buying businesses for job security or because they anticipate a better return on investment (ROI) than with other investments."

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Individuals may be looking to buy businesses at lower price points, but businesses are the main buyers of businesses valued at more than $5 million. Forty percent of those buying businesses valued at more than $5 million were other companies looking to grow through acquisition. Thirty percent of high-market buyers were private equity platforms, while 20 percent of buyers were private equity add-ons. (A "platform" acquisition means buying a company in a new industry, while an "add-on" means acquiring a similar or complementary company.)

Buyers in the lowest price point relied on little outside help in closing deals. Just 8 percent of buyers of businesses valued at less than $500,000 required investors, while 25 percent of buyers of businesses valued at more than $5 million were reliant on investors. Buyers in the $2 million to $5 million range required the greatest investment, with 13 percent relying on funds from investors and 25 percent relying on funding from family and friends.

"The transition from a seller's market in the third quarter of 2012 to the current buyers market reflects more confidence in our economic recovery," said report co-author John Paglia, director of the Pepperdine Private Capital Markets Project and associate professor of finance at Pepperdine University's Graziadio School of Business and Management, which conducted the research. "For deals under $500,000, the majority of buyers (73 percent) are coming to the table with cash — this is an important sign that our economy may be turning around."

Sellers have two predominant reasons for putting their businesses up for sale, the research found. Overall, low-middle market businesses say they were selling their business either to retire or because they were worn out from running a business. However, the researchers suggest that the current market may be a precursor to the next several years.

"Trends show a growing number of businesses on the market and we can expect listings and engagements will continue to increase as baby boomers look to retire and sell their businesses," said Jim Afinowich, president of Fox and Fin Financial Group.

The research was a part of the Market Pulse Quarterly Survey report conducted by the International Business Broker Association (IBBA) and M&A Source. The research was conducted with the Pepperdine Private Capital Markets Project and the Graziadio School of Business and Management at Pepperdine University.

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