Low risk, steady cash flow, and future growth potential are major considerations for buying a business. These attributes are often found in service businesses, the largest sector of recent small business acquisitions. According to BizBuySell’s Insight Report, 39% of acquisitions in 2022 were service businesses, up 7% over the previous year and exceeding 2019 pre-pandemic levels.
Despite facing economic challenges centered around inflation and interest rate hikes, service businesses sold in 2022 showed strong performance. Median revenue rose 3% year-over-year and median cash flow rose 3.4%, respectively. Buyers also paid more for service businesses in 2022, with the median sale price up 4% to $300,000, and earnings multiples 2.6
To put this in context, the overall business for sale market in 2022 experienced a 2% decline in median revenue and 1% decline in median cash flow. Furthermore, with weaker financial performance, combined with the rising cost of obtaining capital, median sale prices declined 3%. Nevertheless, buyers demand was strong, with the number of reported business-for-sale transactions up 4.7% in 2022.
Overview of the service business sector
While no business is truly risk-free, many service businesses are considered ‘recession resistant’ and highly desirable during economic uncertainty. Businesses such as health care, IT consulting, plumbing, or even pest control, are essential to everyday life. During the height of the pandemic, essential businesses experienced strong financial performance and were highly sought after on the business-for-sale market. Furthermore, unlike retailers or manufacturers that rely heavily on inventory and materials, most service businesses specialize in intangible product offerings. Thus, they are not subject to supply chain issues or inflation driving up costs of inventory or raw goods.
However, service businesses do face challenges, such as scaling, finding and retaining skilled workers, as well as reliance on customer satisfaction. Establishing credibility and market share are also important, which can take time. Moreover, in an uncertain economy, consumers may pause or limit spending on luxury or non-essential services.
That being said, buying an already established service business can reduce many of these risks. A business that’s already established typically has built-in cash flow, a proven business model, trained employees, as well as a customer base and a recognized brand. The first challenge is finding a service business that’s right for you.
Tips for buyers seeking to purchase a service business in 2023
At first, finding the right service business may seem overwhelming. You may already be browsing opportunities on business-for-sale marketplaces, or even reaching out to business brokers and professional colleagues. However, you can narrow the possibilities and get a clearer and more realistic picture by first identifying your ideal acquisition target.
- Choose a business that fits your skills and lifestyle. If you’re looking to purchase a service business, consider an industry that matches your interests. For example, if you have experience in healthcare management or finance, you might consider medical billing. Also, consider how much the business will need to earn to support your lifestyle and whether you prefer to be passively or directly involved in the day-to-day operations.
- Look at the potential of each opportunity carefully. Once you find a business that seems appealing to you, look at it closely and ask questions. Review at least three years of financial records. Consider if the asking price is reasonable based on its gross sales and cash flow. Do you see any potential? Perhaps there are ways to grow the business. If it seems like a good opportunity, consider making an offer.
- Rely on professionals during negotiations and closing. There are many steps involved in the process of buying a business. However confident you may feel about the opportunity, a business broker, as well as your accountant and attorney each serve important roles – from connecting you with the right opportunity to verifying financials and protecting you from liability.
- Consider multiple financing and purchase options. When it comes to purchasing a small business, there are a myriad of ways you can structure the deal. However, most are done through a combination of cash, a bank loan, and potentially seller financing.
Tips for owners seeking to sell their business in 2023
Buyers are continually seeking good opportunities, so planning your exit is key. Not only do you want a general understanding of what your business is worth, but also your options for exiting and what it will take to meet your financial goals. Whether you’re thinking of listing your business on the open market, passing it down to a partner, employee, or family members, it’s important to have an exit plan.
- Estimate the value of your business. Finding out what your business is worth in its current condition is a great way to get started in the exit planning process. A professional broker valuation, such as an Opinion of Value, can benchmark a business’s financial health, condition, and location against similar businesses sold in the area. You can also get a ballpark estimate using ‘comps’ or comparable data of businesses similar to yours that have recently sold.
- Develop a plan that meets your exit goals. A business valuation can be very sobering, identifying any weaknesses or shortcomings that may prevent you from meeting your exit goals. Depending on your exit timeline, this is your opportunity to enhance the value of your business. After reviewing your financials, you may discover areas where you can cut expenses and increase your bottom line. You may also discover opportunities to grow sales and increase revenue streams.
- Get your financials in top shape. Before you can start marketing your business for sale, you should have at least three years of clean financial records for potential buyers to review. Be sure to include income/profit & loss statements, a balance sheet showing the value of your assets and liabilities, and corresponding tax returns. Enlist an accountant to help you organize your records and provide guidance. When it comes time to sell, lenders also generally require three years of financials in order to approve a loan.
- Assemble your professional sales team. Business brokers play vital roles in the successful sale of a business and act as intermediaries throughout the entire process–from valuation and exit planning to marketing the business for sale and negotiating the final deal. Your accountant will ensure your financials are prepared by a credentialed professional, and not only hold up during due diligence, but also when reviewed by lenders. Plus, your attorney will need to protect your interests, from drafting your confidentiality agreement and purchase and sale agreement to overseeing negotiations and the closing process.
Opportunities in today's business-for-sale market
While there has been much written about coming headwinds in the media, the economy is still growing, and consumers are continuing to spend money. With 500,000 jobs added in January 2023 combined with increased wage growth, consumers seem to be staving off any downturn. For owners looking to exit their business in 2023, demand for profitable businesses remains strong. Likewise, entrepreneurs should continue to be on the lookout for great opportunities.
This article was written by Bob House from Inc. and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to [email protected].
