How Do Recessions Affect Business Sales?
by Matteo Valles · Updated Mar. 1, 2021
Due to the economic effects of Covid causing a global recession, I was curious about how past business cycles have impacted people’s ability to sell their business compared to today’s environment.
Let’s just say…2020 was a doozy.
Below I’ll show you:
Total reported sales each year
Sales across price ranges and industries
EBITDA multiples each year
My research included over 17,000 business sales in the US across all industries from 1990 through 2020 with a sale price between $100k to $20M. All recessions are marked with a gray box.
It’s important to note that this data does not include every business sale that has happened over the last 30 years. The database being used consists of business sales reported mainly by Business Brokers/M&A Advisors. Therefore, a parent selling their business to their child is most likely not included in this data. This data has also become easier to track as the internet has become more pervasive, so much of the increase in sales from 1990 to the early 2000’s can be attributed to the growth of the internet.
But, let’s jump into the data.
Number of Sales Per Year:
Sales decreased by -37% from 2008 to 2009
Sales decreased by -65% from 2019 to 2020 – almost twice as much as the Great Financial Crisis (GFC)
While 2008-2009 is remembered as a terrible recession, Covid had an even larger impact on business sales.
If we look at the years after the GFC, we see that it took until 2015 to get back to 2008 levels.
While I believe it will take several years to return to the 2019 level, I am optimistic that we will get there faster than we did after the GFC.
This is mainly due to buyers and lenders viewing Covid more as a temporary setback instead of a permanent one.
Lenders are normally very cautious about lending to a business with declining revenue or profit, which most businesses experienced in 2020. But they are potentially willing to overlook a few months of down revenue due to Covid if you can show that business is returning to normal.
As businesses begin returning to normal levels, lenders will be more willing to make loans, so I believe we will see the sales start rising again in 2021.
Number of Sales Per Year Across Price Ranges:
No price range is immune to a recession as all price ranges were negatively affected in both 2009 and 2020
The GFC hurts sales the most within the $1M-$10M range with a combined decrease of -41.5%, but the smallest businesses were close behind at -39%
Covid hit smaller businesses the hardest with a decrease in sales of -67% within the $100k-$500k price range
Larger businesses ($10M-$20M) seem to be the least affected during a recession as they fared the best in both 2009 and 2020
Why were the smallest businesses hit the hardest during Covid?
Let’s look at two common types of buyers -
The Operator: An individual purchasing a business to operate it day-to-day with the hopes to take care of their family with the income generated.
The Investor: A person, group, or company purchasing the business as an additional investment to an existing income stream.
The smaller the business is, the more likely the buyer will be an operator. Once business purchases become larger (~$5M+), the buyer pool becomes much more heavily weighted towards the investor profile.
An operator-buyer will be much more risk-averse and usually less experienced in business purchases. After all, if the business fails, they may not be able to take care of their family.
Whereas an investor-buyer will typically have more capital and experience and is thus able to wait out the bad times.
This creates a dynamic where larger businesses may still be able to sell during recessions, whereas few operator-buyers want to purchase a business.
Larger businesses also tend to have more assets that still have value in a recession. Assets like machinery, vehicles, and real estate can still hold value despite a lull in revenue.
Number of Sales Per Year Across Industries:
Construction was the hardest hit in the GFC, with a decrease in activity of -75% from 2007-2010. All other industries over the same period saw an average decrease of -14%
Bars & restaurants were the hardest hit in 2020 with a decrease of -75%
Manufacturing and retail fared the best in 2020 at -56% and -47% respectively
It is no surprise that bars and restaurants were the hardest hit by the pandemic as they have been closed and/or limited on the number of customers they can serve.
I was initially surprised to see that retail (excluding bars & restaurants) came out the best, but as I dove into the data, I realized several of the retail sales were within spaces that did well during the pandemic. Industries like lumber & building materials, liquor stores, lawn care equipment, and pet supplies.
EBITDA Multiples Over Time:
Overall EBITDA multiples have dropped since 2006
This trend is likely due to smaller business purchases
This graph was very surprising.
I expected to see a stable EBITDA multiple throughout time with drops during the recessions.
But a closer look revealed that the decrease in EBITDA is due to the increase in smaller business sales as shown in the 2nd graph.
Businesses within the $100k-$3M range may sell for 1x-4x EBITDA, whereas larger businesses may sell for 3x-10x EBITDA.
The effect that smaller businesses have on the overall EBITDA multiple can be seen during the recession years where the average actually increases. This is due to smaller businesses being hurt the most and thus making up a smaller portion of the average, giving the appearance that EBITDA multiples are increasing.
The number of business sales per year can be a good indicator of how well an industry or economy is doing.
If business purchases are increasing, it is likely a sign that buyers and lenders feel confident about the future.
It also means that business owners are successfully selling their business and likely able to retire.
Unfortunately, it appears that no industry or size of business are safe from the devasting effects of a recession.
I am optimistic of the future though.
The GFC saw a very slow rise back to previous levels of activity as the recession went on for years and people were unsure about the future.
Today, the mindset seems to be more focused on a swift recovery back to normal as the vaccine continues to rollout.
If you are a business owner and your business has recovered back to normal levels, a buyer and lender will likely be willing to overlook a few down months due to Covid.
East Tennessee | M&A Advisor/Business Broker