ABC Business Sales' third Quarterly SME Intelligence Report reveals interesting trends for the business sales market.
ABC is the first organisation to share statistics related to business sales and price. Managing director Chris Small says, “We believe it is important to further educate New Zealanders on business ownership so they can provide investment options outside of property and listed shares.”
The business sales market is experiencing a significant gap between supply and demand and this has accelerated in the last six months.
Demand from buyers wishing to purchase a business is showing significant increases - up 30 per cent compared to the same period last year.
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Supply of businesses listed for sale are showing decreases of 15 per cent at a total market level.
The excess demand and reduced supply characteristics of the current market have resulted in elevated prices for businesses in all industries including hospitality.
For ABC, signed confidentiality agreements completed by potential purchasers have increased by 31 per cent when comparing the 12 months to July 21.
Inquiry levels have accelerated to exceed the previous year, driven by four key factors: returning expats, high volumes of domestic and international capital, business ownership becoming a popular alternative to the standard salary/employee option, and low-interest rates making business ownership a more attractive investment.
ABC’s business sales volumes for 12 months to July 2021 are up 47 per cent. This is the result of a very strong market where the majority of businesses listed for sale are being sold.
A number of businesses are being sold above asking price and getting multiple offers. There is no doubt we are currently in a “seller’s market” and following a very similar trend to the housing market which shows listings are at all-time lows.
For the 12 months to July 2021, ABC sold 465 businesses against 317 for the same period last year.
Overall, the average price for SME businesses ($0-$5m) excluding hospitality has increased by 16 per cent for the 12 months to July 2021. The increase has been driven by a buoyant market with demand exceeding supply for quality businesses and forcing purchasers to pay higher prices.
Perhaps the most interesting data presented is the material difference in investment returns when comparing pre-tax yields for commercial property against private business ownership.
The average business price is currently $733,460 and based on an EBITDA market average multiplier of 3.5 times the pre-tax yield equates to 29 per cent.
The average commercial property pre-tax yield currently ranges between 4-6 per cent and varies depending on a number of factors including the quality of tenant, location, building quality and the terms of the lease. For this comparison ABC have used a midpoint of 5 per cent for commercial property yields.
Clearly, there is a material difference in the annual yields, with private business ownership returns being six times higher than commercial property yields. This analysis excludes any capital gains for each asset class.
The pre-tax profit for business ownership is based on the company being fully managed with limited input from the investor. It needs to be acknowledged that private business ownership has a higher risk profile than investing in commercial property.
However, ABC don’t believe the risk premium for investing in a private business is anywhere close to six times higher than investing in commercial property. Based on this data ABC expect business values to continue growing and more investors to realise this asset class can be extremely rewarding and lucrative.
The data set used for the average price calculations are all the transactions completed by the ABC Group in the $0-$5m price range. ABC has approximately 35-40 per cent market share of this segment and hence this data is regarded as accurate and meaningful.
“The data clearly shows the business sales market has unprecedented demand fueled by a number of key drivers and the supply of quality businesses is below its historical average. The result has been material price increases for businesses and confirms the current environment is a seller’s market,” says Small.
Contact: Chris Small, 0800 180 222, [email protected]
- Article supplied by ABC Business Sales
