Third Quarter – Market Outlook 2020

In our recent post, When Will the Market Return to Normal?, we discussed factors that will contribute to the economic recovery from the pandemic, as well as what the timeline will look like for the transaction market to return to the highs seen in 2019.  We had already begun to see signs of a slow, gradual recovery and the latest Insight Report from BizBuySell for the third quarter confirms this and paints a slightly more optimistic picture. Closed transactions rebounded from a  decline of 51% in the year over year monthly comparisons for April to only a 5% decline in the month to month comparisons for September.  Over 2,000 transactions closed in Q3 as compared to 1,500 in Q2.

The survey also shows that despite the rebounding transaction market, Seller confidence has been slipping while Buyer confidence has been gaining. It’s indicative of the notion that Buyers are sitting on a lot of cash waiting for the right time to jump back in, particularly if assets can be bought at a a discount.  While we generally agree that it’s a Buyer’s Market, we’re heartened by other surveys that show that some businesses are trading at historically high multiples. GF Data reported that acquisitions made through Q2 of this year with enterprise values between $10 and $25 million and between $25 and $50 million sold at multiples of adjusted Ebitda for 5.9 and 6.8 respectively versus historical average multiples of 5.7 and 6.4.   We can only assume that if a business is still doing well, it may in fact trade at a premium because of strong buyer demand needing to put capital to work.

Quarter over Quarter Closed Transactions Graph

Transaction activity made a strong recovery in the third quarter.  Three primary factors seem to be driving this demand:

  1. Buyer confidence: The majority of buyers believe they can buy a business at a better value than a year ago.
  2. Recently Unemployed: Some of those who are recently unemployed are seeking to “buy a job” and gain more control over their futures.
  3. Pandemic-Proof Businesses:  Businesses thriving in these uncertain times are highly desirable and sparking buyer interest.

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2020 Confidence Index

The pandemic has forced a strong swing in both Buyer and Seller confidence, with Sellers believing they could have sold their business  for a higher value a year ago.

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Quarter over Quarter Asking vs Sale Price Graph

Businesses sold in the third quarter tended to be those able to maintain or grow their financial position.

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Time Graph Median Financials

Pandemic-proof businesses with strong financials drove median ask and sale prices higher, off setting depressed sale prices made to sellers hurt by the pandemic.

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