Business for Sale Insights - Business Data and Stats
Deals Closed – Statistical Analysis
Approximately 50% deals took between four months to six months to close in 2014. See illustration below. Based on this distribution, on an average, a business will take 8.5 months to sell. The time required to sell a business depends on a number of factors including type of business and asking price for the business and type of buyer. Types of business include Manufacturing, Business services, Consumer goods & services, Health care & biotech, Wholesale & distribution and several others. There are two types of buyer’s strategic buyer and financial buyer. Understanding the buyer type is perhaps the single most important factor when it comes to engaging a buyer and negotiating a deal.
There are several reasons a business transaction may fall through. Top three reasons are valuation gap in pricing (29%), insufficient cash flow (22%), and lack of capital to finance (12%). Valuation gap is responsible for almost 30% deals not going through. Both the buyer and seller must complete valuation of the business independently and come up with a valuation range. If there is an overlap then zone of probable agreement (ZOPA) exists and there is a good chance the two parties will find a number during negotiations.
Insufficient cash-flow and lack of capital to finance is another major reason to deals do not go through. It is important to qualify buyers before negotiating a deal.
Of the 30% deals that did not go through because of valuation gap, 65% of the deals had a gap between 10% and 30%. As expected the numbers deals failing for less than 10% gap is very low. When the numbers are so close the buyers and sellers should generally be able to agree on a number and come to a deal
About 50% are strategic buyers and 50% are financial buyers. Financial buyers will not negotiate much as they have to stick to their financial models. Strategic buyers on the other hand have longer term view and may have synergies with existing assets. On a an average, 21% strategic buyers paid 0-10% more and 29% paid 11-20% more.
For these reasons it is critical for sellers clearly undertand the buyer persona. Financial buyers look for value and evaluate business financial statements in detail. They leave very little room for premium and remain close to the valuation price. They are driven by Return on Investment (ROI) and use large amounts of financinhg. A financial buyer may not hold the business for long. They may fix the business, improve the financial statements and sell the business.
Strategic buyers on the other hand tend to stay in the business for long periods of time. They may buy the business to enter into a new market, increase market share or foreclose a competitor from acquiring the business. In terms of duration, strategic deals are also done much faster. Strategic deals are preferred because they are done within six months, there are lower chances of valuation gap pricing issues and seller may walk away with a small premium between 10% and 30%.
Canadian Small Business Data
The following is a summary of small business statistics released by Statistics Canada in 2012. Small businesses contribute between 25 and 40 percent to Canada’s GDP. At the end of 2012 there were over 1 million small businesses in Canada that had employees. Specifically, there are 1,107,540
employer businesses in Canada. Of these 1,087,803 are small businesses with 1 to 99 employees. 18,169 are medium-sized businesses with 100 to 500 employees and 1,568 large businesses with more than 500 employees. In other words 98% of businesses in Canada have less than 100 employees. Ontario has 381,001 small businesses, Quebec has 232,531 small businesses, British-Columbia has 169,178 small businesses and Alberta 151,866 small businesses. Ontario, Quebec, BC, and Alberta account for 934,576 (or 86%) of all small businesses in Canada. Of the 1,107,540 employer small-businesses, 55.1 percent have only 1 to 4 employees (also known as micro businesses).
Small businesses employed about 70% of total private labor force – that is more than 7.7 million individuals. More than 80 percent of small businesses that started in 2008 survived for one full year and 72 percent of small businesses that started in 2007 survived for two years. There were 3,200 bankruptcies in 2012, which is 56% lower than 2000.
Approximately 22% of small businesses produce goods. Goods producing businesses include manufacturing, construction, forestry, fishing, mining, quarrying, and oil and gas. The rest of the businesses provide services. Examples of businesses that provide services are wholesale and retail trade, accommodation and food services, professional, scientific and technical services, finance, insurance, real estate and leasing and health care. More than 550,000 (over 50%) small businesses are concentrated in wholesale trade and retail, construction, professional and technical services.
Wholesale and Retail Trade industrial sector is the largest small businesses employer and employs approximately 1.8 million individuals. Accommodation and Food Services is the second largest employer with 1 million employees. Other sectors with large number of employees include Manufacturing, Construction, Technical services and financial services. On an average, small businesses create 100,000 jobs each year and since 2010, over 530,000 jobs have been created by small, medium and large businesses combined.
Approximately 50% – 55% of firms in Canada have 0-10% growth rates and the average growth rate seems to be 5% for manufacturing and service sectors. Approximately 15-20% of all businesses have 11% – 20% growth and only 7.5% to 10% of businesses have more than 20% growth rates (high growth firms). Approximately 25% of all small businesses have zero or negative growth rates.
According to the Organisation for Economic Co-operation and Development (OECD), to qualify as a high-growth firm it must have an average annualized growth rate greater than 20% per year over a three-year period, and it must have 10 or more employees. Growth rates can be recorded in terms of revenue or in terms number of employees. Highest concentrations of high growth firms in Canada are in construction, business, building and other support services and professional, scientific and technical services. Canada has fewer high growth firms as compared to the United States.
Canadian enterprises of all sizes exported goods worth approximately $374 billion in 2011. Small businesses accounted for 23.9 percent, medium-sized businesses accounted for 16.2 percent and large businesses accounted for 59.9 percent. Unsurprisingly, almost 90% of Canadian SMEs export to the United States and only 32% export to Europe. China and Latin America ate emerging export destinations with approximately 20% and 10% small businesses exporting to these countries respectively.
Finally, the manufacturing sector within small businesses has the highest innovation. Transportation and warehousing has the lowest percentage firms innovating. Other sectors with high – level of innovation include knowledge-based industries and professional, scientific and technical services.
Is Canada more entrepreneurial than the US?
As per census.gov there are approximately 27 million businesses in the US in 2008. However, more than 21 million forms are non-employer firms. Approximately 6 million firms are employer firms. Of these only 18 firms have more than 500 employees, which is negligible. So we can conclude there are 6 million businesses with 1 to 499 employees and 2.5 million businesses with 5 to 499 employees in the US.
As per statscan, in December 2012, Canada had 1.2 million small businesses with 1 to 499 employees on payroll. Similar to the US, approximately 50% of the workforce is employed by small business. Canada is approximately 10% of US population, so one would expect Canada to have 600 thousand small businesses. With 1.2 million small employer firms, Canada may be twice as entrepreneurial as the US. That said this analysis is purely qualitative and does not take into account the quality and size of the average business. The results are also surprising given the fact that US leads Canada significantly in the ease of doing business report compiled by the World Bank.