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Why Are a Record Number of Small Business Owners Selling Their Companies?

Author

Sarita Harbour

More by Sarita
Author

Sarita Harbour

More by Sarita

If you've noticed more media headlines on the topic of sales of small businesses recently, you're onto something. As the Washington Post reports, in 2016, small business sales in the United States reached record highs.

The past few years have seen a steady increase in annual small business sales across America, and BizBuySell's quarterly report found that, in the fourth quarter of 2016, there was a 17.6 percent increase in these transactions (compared to 2015's Q4 total). So, what's causing this? Is this trend here to stay? Here are a few insights to explain this phenomenon.

A New Generation

As the baby boomer generation moves toward retirement, many small business owners from that cohort are opting to sell their enterprises. In fact, according to BizBuySell's report, 70 percent of business brokers surveyed credited at least a quarter of their closed sales to retiring boomers. A further 98 percent said that they expect this trend to continue in 2017. With better financing options and a desire to enter the small business world, many entrepreneurial millennials are taking advantage of their generational predecessors' decision to sell.

Improving Financial Metrics

Another factor contributing to the increased sales of small businesses is the improved financial metrics of these companies. While the number of businesses sold in the fourth quarter of 2016 had an 8.6 percent higher median revenue than 2015's last quarter, business cash flow in the same period increased 4.7 percent, according to the BizBuySell report. These statistics indicate healthier businesses, which naturally appear more enticing to potential buyers. In the same quarter, the average time a business spent on the market dropped 11.6 percent from Q4 2015, signifying a strong market for selling.

The Election Results

Economic optimism following the recent election is also believed to be contributing to this surge in the small business market, according to the BizBuySell report. Over a quarter of the polled brokers believe the policies of the new administration will cause another increase in the sales of small businesses in 2017, and more than half believe that more buyers will enter the market as a result.

With a steadily improving small business world, many young entrepreneurs want to purchase existing businesses. While this new generation works their way into the market, baby boomers look to retire and capitalize on their healthy and successful companies. With the economy finally getting over the 2008 recession, more capital and better financing options will likely allow millennials to meet the desired prices of small business owners. BizBuySell has calculated a 92 percent sale-to-asking price ratio for 2016, signifying a balanced market, which is good news for everyone.