A Balanced Market Leads to More Deals
Normalizing Business Valuations Are Creating a Win-Win Environment for Business Buyers and Sellers
2020 was a strange year for businesses and business owners. Some struggled while others thrived. As a result, fewer healthy businesses were coming up for sale, so those that were for sale commanded a premium price. It was a true sellers’ market and a bit of a feeding frenzy ensued.
But, as I first predicted at the beginning of June 2021 (https://www.calhouncompanies.com/expert-insight), Q3 of 2021 saw the frenzied pace of inflated business valuations subside. As more businesses began to recover from Covid restrictions and regulations, more healthy businesses came up for sale, and business valuations came back to previous normal ranges.
Now as we near the end of Q3 2021, we are experiencing an equilibrium of sorts, resulting in near-record highs in both closed transactions and transactions set to close soon. Nationally, per www.BizBuySell.com, deal volume increased 5 percent from Q1 to Q2, and I would expect that rate to be even higher once Q3 totals come in. At our office, Q3 has seen productivity at near record levels. It’s truly a season of “win-win” deal making. Here’s why:
- Sellers are happy: While the business valuation boom might be subsiding, values are still incredibly strong. Healthy businesses are getting attention from buyers, and deals are happening relatively quickly. Banks are also hungry to lend, so most sellers can walk away with most of their sale price in cash.
- Buyers are happy: Compared to a year ago, there’s more inventory to choose from, meaning buyers not only have options, but in some cases, that they even have a chance to buy a business at all. Normalized business valuations also mean that buyers can more easily obtain financing and can generate the financial returns they desire.
- Banks are lending: Much like buyers and their return on investment requirements, banks need their deals to fit their lending parameters. When business values were running away, it became harder and harder for banks to finance business acquisitions. Now, the business values are reaching a happy medium, and the businesses continue to be healthy, so banks are able to get the returns they require to make the loans.