Main Street Businesses Healthier, Surviving Longer and Receiving Higher Sale Prices
The survival rate of small businesses has reached a thirty year high, as more high quality businesses arebeing sold on the market by retiring baby boomers
PHOTO CREDIT: Getty Images
Main Street businesses, the ever so familiar family-owned dry cleaners and coffee shops lining our local neighborhoods, are thriving these days. According to the Kauffman Foundation's Main Street Entrepreneurship Index , the survival rate of small businesses has reached a three-decade high of 48.7 percent. As big box retailers go bust and online shopping becomes a way of life, there's no substitution for some of our favorite local mainstays.
Main Street businesses have made a healthy rebound since the Great Recession. According to BizBuySell Insight data on closed business for sale transactions, established business financials have been growing since 2010, with the median revenue of sold businesses reaching a new high in the second quarter of 2018. At the same time, the National Federation of Independent Business (NFIB) reported small business optimism is well above the 45 year average, as small businesses celebrate strong sales, job creation and high profits. Yet, a stronger economy isn't the only factor at play.
Several other factors may be influencing Main Street business survival rates:
- Easier access to capital. After the Great Recession when banks entered a "credit crunch" and sharply pulled back on lending, online lending platforms began to emerge. By 2010, existing small businesses were able to find alternative financing methods, such as LendingClub and Prosper. Additionally, more SBA loans are being issued. A recent SBA loan report showed a steady increase in loans being issued over the past three years. In comparison, many startups have a more difficult time getting funding. According to Pitchbook, a research company that tracks VC funding, the number of seed and early-stage deals has dropped steadily since 2014 while investors move downstream to more established companies.
- Increased consumer spending. Since 2010, the unemployment rate has steadily dropped. Lower unemployment rates and a stable labor force fuel a stronger economy leading to increased consumer spending at Main Street businesses. According to the Bureau of Economic Analysis, personal consumption expenditures have made steady gains since 2010. As a result, many of these Main Street businesses show stronger financial performance, and are therefore more attractive to potential business buyers. As existing businesses grow and expand their workforce, more opportunities become available for job seekers.
- Startup activity is declining. According to the Kauffman Foundation, startup activity has been in a long-term decline since the 1980's. It reached its lowest point in 2013 and then inched back up to pre-recession levels in 2016. Economists Ian Hathaway and Robert Litan of the Brookings Institute point to an increase in business consolidation and a decline in population growth as two major factors, citing only 20 percent of American workers are employed by organizations born after the mid-1990s. Millennials, with a growing number of them weighted down with student loan debt, are gravitating more toward stable employment and less toward risky ventures. As fewer businesses are created, existing businesses face less competition - not only for customers, but also skilled employees, capital and other resources.
After falling for five consecutive years and reaching a low of 42.9 in 2011, Main Street business survival rates have been steadily increasing every year to a three-decade high of 48.7 percent in 2016, surpassing levels preceding the recession. Furthermore, small business density has gone up; a higher proportion of all U.S. businesses are now considered Main Street companies, defined as those with 50 employees or less. Between 2008 and 2014 the number of Main Street companies per 1,000 U.S. firms increased from 608.1 to 676.1.
A Record Number of Main Street Businesses Are Being Sold on the Market
While Main Street businesses continue to survive five years and beyond, many owners are deciding to exit their businesses. According to BizBuySell's Insight Report, closed small business transactions have shown a steady increase since 2013. At the same time, data has shown a consistent growth in the financials of these sold businesses. Several factors are influencing this uptick in market activity:
- Baby boomers are retiring and exiting their businesses. According to BizBuySell's 2018 Small Business Study, roughly 60 percent of small business owners are over 50 years old and have owned their business for over 10 years. Furthermore, 32 percent of these owners plan to sell their business within the next 2 years. The U.S. Census estimates that by 2030, 1 in every 5 residents will reach retirement age and all baby boomers will be older than age 65.
- More high quality businesses are entering the market. Many small businesses have been thriving over the last several years and benefited from the strong economy. Hence, strong business financials and a history of success reduce the risk to potential buyers. In 2017 alone, sold businesses have reported a 7.4 percent year-over-year increase in revenue.
- Sold businesses are receiving higher sale prices. While buyers are benefiting from a strong inventory of healthy businesses, sellers are being rewarded with higher sale prices. According to BizBuySell Insight Report Data on closed transactions, the median sale price of small businesses in 2010 was $150,000. By 2017, the median sale price rose 52 percent to $227,880.
While many Main Street businesses continue to survive five years and beyond, a growing number these are expected to enter the market. Activity is expected to remain strong as qualified buyers continue to have access to high quality businesses within a large supply of listings.
BY Entrepreneurs Organization