Small business buyers stay close to home

The big baby boomer sell-off has magnified earnings multiples (so they win again!). Can the next Gens ride the sales wave?

A review of the user search statistics has revealed some interesting differences between buyer preferences in the micro-market (businesses worth less than $500,000) and the main market (businesses worth more than $500,000). 

Location appears to be more important to small business buyers than buyers of larger businesses, with 79% of small business buyers including location as one of their search criteria compared to 72% of buyers of larger businesses. The locations chosen were generally in proportion to Australia’s population spread, although small business searches were slightly higher in regional Victoria and Queensland.

The different choice of industry between the two markets reflected the average size of businesses in various industries. For example there was a higher demand for retail and personal services businesses in the micro-market, while construction and finance businesses were in greater demand at the larger end of the market.

Overall 58% of small business buyers specified both a location and an industry, with Melbourne retail being the most popular combination. In contrast only 44% of larger business buyers specified both a location and an industry in their search criteria. This perhaps reflects the level of intended owner participation in the day-to-day running of a business.

Most small business owners are also the CEO and as such the location of the business in relation to where they live is a key consideration. Similarly they are also more likely to limit their search to businesses in which they have considerable experience and understanding.

Buyers of larger businesses often employ a CEO or COO to run the business on their behalf, and subsequently have different priorities. In fact many buyers of larger businesses are investment funds or other business operations that have quite different selection criteria to the owner operator.

This difference in buyers between the two markets is also reflected in the prices paid for businesses. According to the September quarter edition of BizExchange Index released this week, the prices for smaller businesses have been falling over the last 12 months, while the prices for larger businesses have been more stable.

It has always been the case that larger businesses achieve a higher earnings multiple on sale; however this has widened substantially over the last year as baby boomers sell out of businesses en route to retirement. Next week we will explore how Gen-X and Gen-Y can ride the wave of business sales.

A free copy of the BizExchange index is available from www.bizexchange.com.au

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