Why Buying a Small Business Will Be the Next Hot Trend

Thinking about buying a small business? Now might be the perfect time. A massive generational shift is underway as baby boomers retire, creating a wave of small business ownership opportunities. Combine this with post-pandemic economic recovery, rapidly changing consumer behaviors, and advancements in technology, and it’s clear why small business acquisitions are becoming the next big trend.

Published 12/08/24

A silent wave is building in the business world, one that savvy entrepreneurs are watching closely. As baby boomers begin their mass exodus from business ownership, a subtle but significant shift is occurring in the marketplace. BizBuySell’s Insight Data reveals a telling trend: business sales crept up from 9,054 in 2022 from 9,093 in 2023. While this increase might seem modest, it’s just the beginning of what some predict will be a massive transfer of business ownership. This emerging trend has created a unique moment in time – one that presents both opportunities for buyers and potential vulnerabilities for retiring business owners. As this generational changing of the guard unfolds, the question isn’t just about who will buy these businesses, but whether sellers are adequately prepared to protect their life’s work from undervaluation and opportunistic acquisitions.

Understanding the economic and social factors driving this trend is crucial for both potential buyers and sellers. As we navigate the post-pandemic economy, changing consumer behaviors, and technological advancements, the appeal of acquiring established businesses is becoming increasingly apparent. This blog post will explore why buying a small business is poised to become the next hot trend, examining the various factors contributing to this shift in entrepreneurial strategy.

Economic Trends Driving Small Business Acquisitions

The landscape of small business acquisitions is being shaped by several significant economic trends, creating a fertile ground for this emerging hot trend:

Post-Pandemic Economic Recovery: As the economy rebounds from the COVID-19 pandemic, many industries are experiencing significant growth. According to BizBuySell’s Insight Data, the total value of small business acquisitions rose from $6.3 billion in 2022 to $6.5 billion in 2023, indicating a growing market. This recovery phase presents unique opportunities for entrepreneurs to acquire businesses in rebounding sectors.

Interest Rate Environment: The Federal Reserve has maintained higher interest rates to combat inflation, with the federal funds rate reaching its highest level in over 20 years. While this has made financing more expensive, many buyers are still pursuing acquisitions due to other favorable market conditions and the potential for rate cuts later in 2024.

Generational Shift: As Baby Boomers retire, many are looking to sell their businesses, creating a surge of acquisition opportunities. This “silver tsunami” is expected to continue, with an estimated $10 trillion worth of assets potentially changing hands over the next decade.

Shift to Digital: The rapid digitalization of businesses, accelerated by the pandemic, has created new opportunities. E-commerce is expected to account for over 22% of all retail sales in 2023, up from 14% in 2019. This trend is making digitally-enabled businesses particularly attractive acquisition targets.

Industry Consolidation: In many sectors, larger companies are acquiring smaller ones to achieve economies of scale or to expand their market reach. This trend is creating opportunities for strategic acquisitions at the small business level.

Government Stimulus: Infrastructure spending and other government initiatives have benefited many small businesses, especially in sectors like construction and related services. This has made these businesses more attractive acquisition targets.

Post-Pandemic Economic Recovery: The pandemic has fundamentally shifted consumer preferences and spending habits. McKinsey research shows that over 70% of consumers bought from competitors of their usual brands between May 2021 and May 2022, indicating a significant shift in brand loyalty. This volatility in consumer behavior, combined with the surge in digital commerce and changing shopping patterns, has created opportunities for agile small businesses that can quickly adapt to evolving market demands, making them increasingly attractive acquisition targets.”

The economic landscape is creating a perfect storm for small business acquisitions. With rebounding industries, changing consumer behaviors, and favorable financing conditions, we’re seeing increased interest from both first-time buyers and seasoned investors looking to capitalize on these trends.

These economic trends are not only driving increased interest in small business acquisitions but are also reshaping the types of businesses that are most attractive to buyers. As these trends continue to evolve, they are likely to further fuel the growing trend of small business acquisitions in the coming years.

Post-Pandemic Recovery Opportunities

The economic rebound following the COVID-19 pandemic has created favorable conditions for buying small businesses. Many industries are experiencing significant growth as they recover from pandemic-related setbacks. For example, the food industry has seen a surge in both the number of deals and average sale prices as customers return to dining out. Additionally, the construction sector has benefited from increased government contracts due to infrastructure legislation.

According to restaurant.org,”the foodservice industry is forecast to reach $1 trillion in sales in 2024.” The food industry’s resilience in the face of unprecedented challenges has not only fueled its recovery but has also reshaped the landscape of business acquisitions. As we see sales projected to exceed $1 trillion in 2024, we’re witnessing a perfect storm of opportunity – where technological adaptation, changing consumer preferences, and a surge in entrepreneurial interest are converging to make food businesses increasingly attractive acquisition targets.

This recovery phase presents unique opportunities for entrepreneurs to acquire businesses in rebounding sectors, capitalizing on pent-up demand and growth potential. Entrepreneurship continues to surge: the United States is averaging 430,000 new business applications per month in 2024, 50 percent more than in 2019.

Shifts in Consumer Behavior

Changing consumer habits are creating new opportunities for small businesses, making them attractive acquisition targets. As mentioned above, e-commerce is expected to account for over 22% of all retail sales in 2023. Social commerce is predicted to grow three times as fast as traditional e-commerce, reaching $1.2 trillion by 2025 according to a report by Accenture.

The erosion of brand loyalty presents a unique opportunity for agile businesses. According to McKinsey & Company, 76% of consumers have embraced new shopping behaviors since the pandemic, with 39% actively switching to different brands and retailers. This shift in consumer behavior, driven by inflation and value-seeking, creates an opening for businesses that can quickly adapt to meet changing customer needs while delivering competitive prices and superior service.

These changes in consumer behavior are opening up new markets and niches, making established businesses in these areas particularly appealing for acquisition.

Emerging Markets or Industries

According to Bitcot, several sectors are showing promise for small business growth and opportunity:

1. Digital Technology and Innovation

Key Opportunity: Rapid digitalization in emerging markets
Growth Areas:
- Mobile payment solutions
- E-commerce platforms
- Digital infrastructure services
- Cloud computing solutions
- AI-powered business tools

2. Healthcare Technology

Key Opportunity: Growing demand for accessible healthcare solutions
Growth Areas:
- Telemedicine platforms
- Digital health records systems
- Remote patient monitoring
- Healthcare payment solutions
- Medical device distribution

3. Sustainable and Clean Technologies

Key Opportunity: Increasing focus on environmental solutions
Growth Areas:
- Renewable energy services
- Sustainable product manufacturing
- Green building solutions
- Waste management technologies
- Energy efficiency consulting

4. Education Technology

Key Opportunity: Rising demand for digital learning solutions
Growth Areas:
- Online learning platforms
- Professional development services
- Educational content creation
- Learning management systems
- Skills assessment tools

5. Financial Services

Key Opportunity: Financial inclusion and digital banking growth
Growth Areas:
- Digital payment platforms
- Microfinance solutions
- Mobile banking services
- Insurance technology
- Small business lending platforms

These emerging markets and industries present unique opportunities for entrepreneurs looking to acquire businesses with high growth potential.

Generational Wealth Transfer and Its Impact

The transfer of wealth from Baby Boomers to younger generations is having a significant impact on small business acquisitions. As Baby Boomers retire, many are looking to sell their businesses, creating a surge of acquisition opportunities.

According to a study by Cerulli Associates, an estimated $68 trillion will be transferred from older to younger generations over the next 25 years. This massive wealth transfer is providing younger generations with the capital needed to invest in or acquire small businesses.

The impact of this wealth transfer on small business acquisitions is twofold:

Increased Supply: As Baby Boomers retire, more businesses are coming onto the market, providing a wider range of acquisition opportunities.

Increased Demand: Younger generations, armed with inherited wealth, are more likely to consider entrepreneurship through acquisition as a career path.

This generational shift is not only changing the demographics of business ownership but also bringing fresh perspectives and innovative approaches to established businesses. As younger entrepreneurs acquire businesses from retiring Baby Boomers, they often bring technological savvy and modern management practices, revitalizing these enterprises for the digital age.

Technology’s Role in Simplifying Business Purchases

Advancements in technology are revolutionizing the process of buying and selling small businesses, making it more accessible and efficient than ever before. Online platforms, mobile apps, and sophisticated software tools are streamlining every aspect of the acquisition process, from business discovery to due diligence and deal closure.

Key technological advancements include:

Online Marketplaces: Platforms like BizBuySell and BizQuest have made it easier for buyers to find businesses for sale and for sellers to list their businesses.

Data Analytics Tools: Advanced analytics are helping buyers assess business performance, market trends, and growth potential more accurately.

Virtual Due Diligence: Remote collaboration tools and virtual data rooms are enabling thorough due diligence processes without the need for extensive travel or in-person meetings.

The impact of technology on due diligence and business evaluation is particularly significant. AI-powered tools can analyze vast amounts of financial and operational data, providing insights that would have been time-consuming or impossible to obtain manually. This not only speeds up the acquisition process but also helps buyers make more informed decisions.

As these technologies continue to evolve, they’re likely to attract more potential buyers to the small business acquisition market, further driving this trend.

The Rise of Remote Work and Its Effect on Business Models

The shift towards remote work has significantly reshaped small business operations and created new acquisition opportunities. According to recent studies, 58% of American workers have the opportunity to work remotely at least one day a week, while 35% have the option to work from home five days a week.

This trend has several implications for small business acquisitions:

Expanded Talent Pool: Businesses can now hire from a global talent pool, potentially reducing labor costs and increasing productivity.

Reduced Overhead: Companies with remote workforces often have lower overhead costs, making them more profitable and attractive for acquisition.

New Business Models: The rise of remote work has created opportunities in sectors like virtual collaboration tools, cybersecurity, and home office equipment.

For potential buyers, this trend presents opportunities to acquire businesses with established remote work infrastructures or to transform traditional businesses into more flexible, remote-friendly operations. The ability to operate a business remotely also expands the pool of potential buyers, as geographical constraints become less relevant.

Investor Diversification Strategies

According to the BizBuySell Insight Report, small business acquisitions have shown consistent growth, with a 5% increase in the third quarter of 2024, marking the fifth consecutive quarter with year-over-year gains. This indicates a positive trend in small business acquisitions.

Potential for Higher Returns: Small businesses often offer the potential for higher returns compared to traditional investments like stocks or bonds.

Direct Control: Investors can have more direct control over their investment when owning a small business.

Tangible Assets: Small businesses often come with tangible assets, providing a level of security for the investment.

Tax Benefits: Owning a small business can offer various tax advantages.

However, this strategy also comes with risks, including:

Operational Challenges: Running a small business requires significant time and effort.

Market Volatility: Small businesses can be more vulnerable to economic downturns.

Liquidity Issues: Investments in small businesses are often less liquid than traditional financial instruments.

The “Great Resignation” and Entrepreneurship Through Acquisition

The “Great Resignation” has led to a surge in professionals leaving traditional jobs and turning to business ownership. This trend is particularly evident in the small business acquisition market.

Key statistics:

Over 47 million Americans quit their jobs in 2021

According to the U.S. Bureau of Labor Statistics

52% of small business buyers used 401(k) business financing (ROBS) to fund their ventures, while 19% used cash, and 12% used SBA loans.

A survey by Guidant Financial

The appeal of acquiring existing businesses as a path to entrepreneurship includes:

Immediate Cash Flow: Established businesses often provide immediate income, unlike startups.

Proven Business Model: Acquiring an existing business means taking over a model that has already been tested in the market.

Established Customer Base: Existing businesses come with an established customer base, reducing the initial struggle to find clients.

Lower Risk: While still risky, buying an established business is often less risky than starting from scratch.

Government Incentives and Support for Small Business Acquisitions

Government policies and programs play a crucial role in facilitating small business acquisitions. While specific policies may vary, there are several ways in which government support is encouraging this trend:

SBA Loans: The Small Business Administration (SBA) offers loan programs that can be used for business acquisitions. In fiscal year 2023, SBA 7(a) lenders approved over 57,362 loans, amounting to a total of $27.5 billion in small business loans.

Infrastructure Legislation: Government infrastructure spending has benefited many small businesses, especially in the construction sector, making them more attractive acquisition targets.

Economic Recovery Programs: Post-pandemic recovery initiatives have created a more favorable environment for small business growth and acquisitions. In 2023, a staggering 5.5 million new business applications were filed, marking the strongest year on record. This trend has been consistent since 2021, with over 5 million applications filed each year in 2021 and 2022

Industry-Specific Opportunities

Technology Sector

The technology sector continues to offer significant opportunities for small business acquisitions:

E-commerce Growth: E-commerce is expected to account for over 22% of all retail sales in 2023, up from 14% in 2019, creating opportunities for tech-enabled retail businesses.

Social Commerce: Predicted to grow three times as fast as traditional e-commerce, reaching $1.2 trillion by 2025, this sector offers potential for innovative small businesses.

Remote Work Technologies: With 58% of American workers having the opportunity to work remotely at least one day a week, businesses providing remote work solutions are likely to be attractive acquisition targets.

Food Industry

The food industry has shown resilience and growth, making it an attractive sector for acquisitions:

Post-Pandemic Recovery: The food industry has seen significant growth as customers return to dining out, leading to an increase in both the number of deals and average sale prices.

Changing Consumer Preferences: With consumers becoming more value-conscious due to inflation, food businesses that can offer quality at competitive prices may be particularly attractive.

Delivery and Take-out Innovations: Businesses that have successfully adapted to increased demand for delivery and take-out services may present good acquisition opportunities.

Energy Sector

While specific data on the energy sector isn’t provided in the documents, we can infer potential opportunities based on broader trends:

Renewable Energy: With increasing focus on sustainability, small businesses in the renewable energy sector may be attractive acquisition targets.

Energy Efficiency Services: As businesses and consumers seek to reduce energy costs, companies providing energy efficiency solutions could present good acquisition opportunities.

Infrastructure-Related Energy Services: Given the mention of increased government contracts due to infrastructure legislation, energy businesses related to infrastructure projects may be particularly valuable.

These industry-specific opportunities highlight the diverse range of options available for entrepreneurs looking to enter the small business acquisition market.

The Role of Private Equity in Small Business Acquisitions

While the provided documents don’t specifically mention private equity’s role in small business acquisitions, we can infer some trends based on the broader market data:

Increased Interest: The growing transaction volume and value in the small business market (9,093 businesses sold in 2023, with a total value of $6.5 billion) suggests that private equity firms may be showing increased interest in this space.

Lower Middle Market Focus: According to 37th and Moss. The increase in valuation multiples for transactions in the $5 million to $50 million range (from 4.8X to 5.3X) indicates growing interest in the lower middle market, which is often a target for smaller private equity firms. The $5 million to $50 million segment is the only segment that showed positive year-over-year multiple growth.

Faster Deal Closures: The improvement in average time from process start to deal close (from 13 months to 9 months according to Ibba. could be partly attributed to more efficient private equity processes.

For individual buyers, the increased presence of private equity in the small business acquisition market could mean:

More competition for attractive businesses
Potentially higher valuations
Access to improved due diligence processes and best practices

The lower levels of M&A activity over the past two and a half years have created pent-up demand (and supply), particularly in the private equity (PE) universe..

– Brian Levy
Global Deals Industries Leader, Partner, PwC

Sustainable Business Models and Acquisitions

The trend towards sustainability is becoming increasingly important in the small business acquisition landscape:

Consumer Demand: With consumers becoming more environmentally conscious, businesses with sustainable practices are likely to be more attractive acquisition targets.

Regulatory Environment: As governments implement more stringent environmental regulations, businesses that are already compliant or ahead of the curve may be more valuable.

Cost Savings: Sustainable practices often lead to long-term cost savings, making these businesses more profitable and attractive to buyers.

While the provided documents don’t offer specific data on sustainable business acquisitions, we can infer their importance from broader market trends:

The shift in consumer behavior, with over 70% of consumers buying from competitors of their usual brands between May 2021 and May 2022, suggests that consumers are more willing to switch to brands that align with their values, including sustainability.
The growth in e-commerce (expected to account for over 22% of all retail sales in 2023) provides opportunities for sustainable businesses to reach environmentally conscious consumers directly.

Changing consumer preferences and the shift towards e-commerce are creating opportunities for sustainable businesses, potentially making them attractive acquisition targets.

– Shopify Consumer Trends Report

International Perspectives on Small Business Acquisitions

While the provided documents focus primarily on the U.S. market, we can draw some insights on the global perspective of small business acquisitions:

Global E-commerce Growth: The projection that e-commerce will account for over 22% of all retail sales in 2023 (up from 14% in 2019) is likely a global trend, creating opportunities for cross-border acquisitions of online businesses.

Social Commerce Expansion: The prediction that social commerce will grow three times as fast as traditional e-commerce, reaching $1.2 trillion by 2025, suggests a global shift in consumer behavior that could drive international interest in acquiring businesses with strong social media presence.

Remote Work Trend: With 58% of American workers having the opportunity to work remotely at least one day a week, this trend is likely mirrored in other countries, potentially increasing interest in acquiring businesses that can be operated remotely across borders.

While specific data on international trends in small business acquisitions is not provided, the global nature of e-commerce and remote work suggests that the trend of buying small businesses is likely to have international dimensions.

The rise of e-commerce and remote work is blurring geographical boundaries, potentially opening up the small business acquisition market to international buyers and sellers.

– Arthur Berry & Co.

Conclusion

The trend of buying small businesses is poised to become increasingly popular due to a confluence of factors:

Financial Documents

Economic recovery creating favorable conditions in various sectors

Shifts in consumer behavior opening new market opportunities

Technological advancements simplifying the acquisition process

The “Great Resignation” driving professionals towards entrepreneurship

Government support and incentives for small businesses

Growing interest from private equity in the lower middle market

Increasing focus on sustainable and socially responsible businesses

Globalization of e-commerce and remote work expanding the market

As we move forward, the small business acquisition landscape is likely to become more dynamic and competitive. Potential buyers should be prepared to act quickly, conduct thorough due diligence, and bring innovative ideas to the businesses they acquire. For sellers, this trend presents an opportunity to exit their businesses at potentially favorable valuations.

The next few years may well see a surge in small business acquisitions as entrepreneurs and investors recognize the unique opportunities presented by this evolving market.

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