How will the 2024 economy affect small businesses and the M&A market?
2024 Economy and Business Sales Update
Projections for the 2024 US economy are much rosier than those throughout 2023 and the 2023 economy ended better than expected, with no recession and good performance from a growth, employment, inflation, and business earnings perspective. While Wall Street had its ups and downs throughout 2023, small and mid-sized businesses had a good year for financial performance, business values, and business sale transactions.
See our Blog for information on Interest Rate Effects on SBA 7a Business Acquisition Financing
Citizens 2024 M&A outlook is good news for M&A and business sales transactions with a huge increase in M&A market expectations from both Private Equity and businesses. The Private Equity view expects the M&A environment to increase from 38% in 2023 to 52% in 2024, and the company view of 2024 M&A increased from 25% in 2023 to 466% in 2024. Both sides of the M&A table have high expectations for 2024.
The Citizens 2024 M&A outlook has some especially helpful charts illustrating 2024 expectations from Private Equity this year.
- Private Equity & Businesses Expect a Strong 2024
- Private Equity & Businesses Expect the 2024 Economy to improve
- Most Expect the Economy to Improve
- PE Groups Expect Higher Transaction Volume
- Buyers are Returning to the Market
Goldman Sachs is projecting the US GDP to grow 2.1 % in 2024, with 2% consumption growth, and a rate cut from the Fed in late 2024.
Read Goldman Sachs 2024 outlook here: Goldman Sachs 2024 US Economic Outlook
Better than expected 2023 financial performance led to Wells Fargo changing their 2024 economic forecast to a much brighter one with economic expansion now forecast through the end of 2025. Wells also expects the Fed to reduce interest rates by 125 bps (1.25%) by the end of 2025 with the first rate cut projected to be in May 2024.
Read the Wells-Fargo 2024 economic forecast here: Wells Fargo 2024 US Economic Outlook
The JP Morgan 2024 forecast also forecasts about 2% growth in 2024 with the Fed ending the rate hiking cycle and starting to ease rates in June 2024. JP Morgan expects inflation to run just above the Feds 2% target during 2024 and roughly 4% unemployment. Overall JP Morgan expects 2024 expects an uneventful and boring 2024, a pleasant change from the turbulent 2023.
Read JP Morgan 2024 US Economy Outlook: 2024 Year Ahead Outlook; The Last Leg on the Long Road to Normal
2024 M&A and Small-Midsize Business Sale Outlook
Throughout 2023 the Fed was battling inflation with persistent interest rate hikes resulting in a Prime Rate of 8.5% at year end. Despite the rate increases, 2023 was a good year for small and mid-sized businesses as well as M&A and business sale transactions. 2024 projections for M&A and small to mid-size business sales are optimistic as are the forecasts for the 2024 economy. While 2024 isn’t expected to be a blockbuster year, it is expected to steadily improve and interest rates are expected to start coming down mid-year.
What does this mean to small businesses and the sales acquisitions of small and mid-sized businesses? Is 2024 still a good time to buy or sell a business?
In short, we expect 2024 to be an excellent year for business sales and acquisitions, with some caveats for specific industries.
- Business sales-acquisitions for businesses with solid financial performance continued to be strong in 2023 and we see that trend continuing into 2024. In fact, businesses with strong financial performance have been in very high demand.
- Business sales for very small businesses with weaker financial performance was slow in 2023 and we do not see this improving in 2024.
- SBA lenders were very active in 2023 and we see SBA lending continuing to be our primary funding source for deals under $5 million in value.
- Increased SBA lending interest rates have driven up debt service costs on acquisitions which reduced net after-debt service for buyers. However, we have lenders offering SBA 7a rates below the maximum rate which results in lower debt service for buyers and has kept SBA loan competitive.
- Business values for industrial, manufacturing, construction, and healthcare are holding steady and unaffected by interest rate increases and the economy.
- Industrial, manufacturing, and construction businesses unrelated to new homes continue to see steady profits and growth coming into 2024.
- Retail, food service, and hospitality businesses saw mixed results in 2023 with some recovering and others wrestling with increases in labor and Cost of Goods Sold which are squeezing margins. We expect much the same in 2024.
With the increased in SBA lending rates do deals still pencil out and make sense?
It was disappointing to see interest rates increase throughout 2023 and drive up the debt service for business sale transactions. Despite the steady rate hikes in 2023 Pacific Business Sales successfully obtained SBA financing on 90% of our transactions with our preferred SBA lenders offering rates well below the SBA maximum rate.
Going into 2024 SBA lending continues to be very active and we expect our historical trend of SBA financing to continue. The expected Fed rate cuts in mid-2024 will certainly envigorate the SBA lending market and lead to increased M&A and business sales activity.
Connect With Orange County & California Business Broker Experts
Pacific Business Sales is a premier business brokerage firm founded by Bill Grunau. He has more than 20 years of experience successfully closing transactions both as asset sales and stock sales, including businesses with licensing. At Pacific Business Sales, our network of financial advisors know the tax strategies to minimize taxes on a business sale. For a consultation or more information on our services, contact us and speak with one of our professionals today.