Even as the economy was cooling off coming out of the winter and stung by the effects of the spread of coronavirus, businesses are selling at record paces in Nevada.
In northern Nevada, The Liberty Group is coming off its best year ever, owner and broker Brad Bottoset said. The great year in 2019 was coming off two prior years that had also set records and Bottoset felt more of the same was in store for the rest of 2020.
“It’s a steady climb,” Bottoset said. “We’re certainly riding the wave.”
In southern Nevada, First Choice Business Brokers CEO Jeff Nyman has seen similar trends.
“[The year] 2018 was great, 2019 was phenomenal and 2020, we’re already ahead and that absolutely shocked me,” Nyman said. “Even with the virus, it’s still booming. Buyers and sellers are more positives [in the economy] and that’s really made a difference.”
With the economy shaken by coronavirus, the future is all but certain, Applied Analysis Principal Brian Gordon said.
“Given the uncertainty around the world and the implications on the national and local economies, it’s difficult to evaluate what that means, not only for potential investors, but existing business owners,” Gordon said. “Through 2019, given the economic climate, availability of capital and investor interest in real estate and business, there was a significant amount of activity.”
Despite the anecdotal evidence of Nevada transactions, U.S. small business transactions were down 5 percent in 2019 with 9,746 sales, down from a record 10,312 in 2018, according a BizBuySell insight report.
At the root of the drop, which rebounded with a bounce-back fourth quarter was economic uncertainty – business owner confidence dropped 6 points in 2019.
“By analyzing BizBuySell’s proprietary data, we continue to witness a bifurcated landscape where consumer confidence holds at historic highs while small business confidence has experienced a softening due to heightened uncertainty,” CoStar Group Senior Economist and Managing Director Abby Corbett said in the insight report.
Nonetheless, Nevada business transactions seem to be tough to slow down.
Valuing a Business
Bottoset said valuations are anecdotally rising, but it’s hard to base broad statistics to the industry because every business is different. Essentially, a business’ value is based on how much money the business makes the owner-operator.
And businesses are making money. According to the BizBuySell insight report, median revenue and cash flow of businesses sold reached all-time highs in 2019, up 7 and 2 percent, respecitvely.
Beyond that, two companies making the same amount of money could also sell for different amounts based on a variety of factors and comps.
“Just like a realtor would pull up comps in a neighborhood to show X vs. Y, you have to research what a glass contractor sells for that’s making $500,000 vs. a machine shop manufacturing widgets that’s making $500,000,” Bottoset said.
So when valuing a company, the numbers are crunched, those numbers are compared and then there’s the subjective piece of the puzzle: value drivers.
“A business owner is a lot like homeownership, the owner thinks it’s worth a lot more than it is,” Bottoset said. “One business might have been around 25 years, making $500,000 and another is making $500,000 at two years old; 50 percent of buyers might look at the first business positively. Others might look at the second more. You have to look beyond the numbers and understand what might be a value driver.”
A positive value driver would be reoccurring revenue, like subscriptions to an alarm company, while a negative value driver would be client concentration like Mr. Smith representing 30 percent of a business.
There’s also random considerations. Bottoset used the example of an owner who might be a short, left-handed Canadian.
“Maybe a client doesn’t like short, left-handed Canadians,” he said. “There’s risk there.”
Once a value is settled, the next step is finding a way to structure a deal.
“The deal not only has to make sense to the seller, whatever price they want, it has to make sense for the buyer too,” Bottoset said. “That’s something a lot of people forget about. They think the business is worth $1 million now, so you have to make it structured so it makes sense for the buyer whether that’s through seller financing, Small Business Administration (SBA) financing or some combination of both.”
It’s also his job to help a business owner figure out how to ensure a business is worth what they might think it is, by coming up with plan highlighting what they do well and processes and procedures in place to help with what might not be a strong point.
Rising Values
Positive business drivers certainly seem to be rising, at least prior to the COVID-19 pandemic.
The acquisition market is fundamentally different than a decade ago, Gordon said. Instead of a market focused on restructuring, bankruptcies and distressed sales, the deals are based on the strength of the market and strong business performances.
“The market dynamics have shifted dramatically,” he said.
Nyman, who’s in his 27th year in the business, said the multiples continue to go up.
“It used to be you’d see a business sell for 1 or 1.5 [the annual income], now you’re see 2.5 to 3 times,” Nyman said. “We’re asking and we’re getting it.”
He said a franchise resale recently received a three times multiple, while construction companies are reaching the highest numbers, with a construction company sale recently reaching 3.85.
Nyman said the relaxation of small business loans by the SBA has helped push the multiples higher. Primarily, however, he said the loans are going to smaller banks while large entities like Wells Fargo and Chase are “pretty tight on purse strings.”
“There’s a lot of incentive to sell businesses right now,” Nyman said.
There is a large portion of the demographic, aging baby boomers looking to get out of business that are now seeing a good time to sell. In 2005-07, Bottoset said business owners didn’t have to work very hard for money – then 2008 hit and the next few years required twice the work for half the money.
Now, those owners don’t want to miss out on the opportunity to get out while the money is relatively easy.
“That whole generation is getting older and don’t want to fall back into what happened in 2010,” he said. “They’re making money now, they have something to sell so they’re coming to guys like me.”
A decade ago, businesses weren’t make money, which limited the value they’d get in return.
“We’re riding a wave, a wave that’s raised profitability and now they’re worth more,” Bottoset said. “Our industry is well poised for continued growth over the years as baby boomers continue to exit.”
Nationwide, BizBuySell reported sales prices were relatively flat, indicating a buyers’ market. This was in part to sellers looking to avoid an uncertain future.
“Despite uncertainty, the health of both the consumer and small businesses remains strong, and spending and hiring trends remain high,” said Corbett. “Both dynamics have contributed to the strength we’ve seen across all commercial real estate sectors.”
Broad Business
Gordon said businesses sales have hit a very broad segment in Nevada, ranging from entertainment and retail to healthcare and manufacturing, all with elevated pricing.
While specific numbers were hard to come by for Bottoset, he pulled up a rough running tally of sales. The short answer for what’s selling: a profitable business.
He’s seen businesses recently sell ranging from aircraft component manufacturer to food and beverage franchises.
“The common thread through all of them is they’re making money,” he said. “Someone buys the business not so much for the business but buying the revenue stream that comes with it.”
Nyman said approximately 35 percent of closed transactions in Las Vegas are in food and beverage.
“It’s right across the board,” he said. “I don’t think it’s in a particular industry.”
Nyman said the current turnaround time on businesses seems to be approximately 24 months, with one-time buyers coming back two years later ready to put it back on the market.
“That’s pretty much the cycle right now,” he said. “People will get into a business and think this is great and sometimes even quicker than that they’ll say it’s everything you said, but it’s not for me. The turnover in the business is very fast as far as buying and selling.
“Sometimes someone will buy a dry cleaners and not realize how hot it is in the summer. They call us and it’s back on the market.”
While Bottoset and Nyman remained optimistic, Nyman relented that March’s battle with coronavirus could end a good stretch of transactions. Still, he’d like to remain on the positive side.
“My feel is even with the virus, everything will go forward, this is a blip,” he said. “We’ve handled things before.”
Changing Geography
While Nevada’s economy has diversified over the past decade, so too has the map where buyers are coming from. Historically, a large amount of purchasers have come from California.
California might still offer the largest set of people looking, and eventually buying, but the percentage is shrinking and potential buyers are coming from all over the world.
In Reno, Bottoset said he’s seen recent deals with customers from Ohio, Arkansas, Louisiana and Wisconsin.
“Back in 2005-07, before the crash, a lot of the activity we were seeing was out of California,” he said. “Fast forward to now, we’re still seeing a lot of buyers of businesses coming out of California, but the change we’re seeing is buyers from places we’ve never seen before. Reno is now a known entity across the United States.”
Bottoset credits a lot of that to the “Tesla effect.” With publications like the Wall Street Journal regularly mentioning northern Nevada as a place with a growing technology community, Bottoset said it’s now a region on more people’s radar as they’re looking for places to invest.
“Reno was never a consideration for them, but now that they’re reading about it, people are looking for better weather, better tax situations, better opportunities and friendly state business climates,” he said.
In Las Vegas, the sentiments are similar despite a longer track record of national news.
Nyman, who’s company has 40 offices nationwide, said Las Vegas has seen a shift from its base of California as well. He said along with California, Chicago, Minnesota and New York City were big draws. He said only between 20 and 30 percent of buyers come locally, the rest from across the globe.
“It’s not just across the country, it’s international,” Nyman said. “We get a lot of international buyers coming in, it’s a ticket into the country and they pay full price.”
Nyman was referring to international buyers using E-2 Investor Visas, which allows individuals to come into the U.S. with a substantial, controlling investment in a legitimate business operation.
Las Vegas, according to Nyman, has seen an influx in European buyers, from countries like Denmark, England, France and Germany. Asian buyers have slowed of late, he said.
While Nevada stays strong and attracts buyers from across the globe, BizBuySell expects 2020 nationwide transactions to remain relatively flat – and the report came out prior to the full scale impact of coronavirus.
“While there is definitely some uncertainty in the market, it’s good to see that 2019 transactions remained strong overall,” BizBuySell President Bob House said in the report. “Buyers and sellers are obviously still seeing value in today’s business-for-sale market and that momentum will likely continue well into 2020, even if levels plateau a bit due to economic and political concerns.”
