Volume up, prices stretched

More businesses are being offered for sale, but owners are finding it harder to get the price they want.

As the finishing touches are being put on the September Quarter BizExchange Index a few things are becoming apparent in the data. First, the number of businesses being advertised for sale has increased again, making it four consecutive quarters of growth.

Second, similar to residential, it is developing into two separate markets: the characteristics of the small business market are decidedly different from the larger business market.

The number of businesses for sale has increased in all participating industries with the exception except of retail and hospitality; however both of these remain over-represented in our sample.

Most of the increase in volume has been at the smaller end, with a significant jump in businesses valued at less than $100,000. These owner-operated businesses are also finding it difficult to attract good sale prices, with businesses for sale valued at less than their annual profit figures now part of the landscape.

Businesses with a turnover of less than $1 million represented about 80% of the market. It is also this sector of the market that is the most vunerable to the demographic changes in ownership that are increasingly apparent. Although there is growing evidence of increased institutional funding available for medium-sized businesses, the small business owner is likely to be reliant on selling their business to an owner operator.

With Gen X and Gen Y unable to access their superannuation savings to purchase their own business, and already heavily in debt due to high housing prices, funding of the business purchase is going to be an ongoing issue.

At the same time the number of baby boomers looking to sell is increasing, which is likely to put further downward pressure on already low prices. Further to this is the continued growth of franchises. There appears to be a correlation between the volume of franchises in an industry and very low valuations for small businesses in those industries.

The news for larger businesses is far more positive. There appears to be a gradual increase in the higher-end values of larger businesses across a number of sectors.

This is underpinned in part by acquisition activity of existing businesses as well as a growing number of funds being established specifically to participate in the purchase of larger private businesses from baby boomers looking to retire.

Further to this, BizExchange has noticed that the average advertising duration for larger businesses offered for sale on www.bizexchange.com.au is falling, while the advertising duration for smaller businesses have risen.

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