How will the 2025 economy and interest rates affect small businesses and the M&A market?
2025 Q1 Small Business Acquisitions Up over 2024 Q1!
Updated April 28th, 2025
BizBuySell 2025 Q1 Market Insights Report: Manufacturing Values Surge! Overall Demand Remains Strong.
Despite worries about the 2025 economy, tariffs, and inflation, the BizBuySell 2025 Q1 Market Insight report shows Q1 2025 Year-over-Year transaction values are up 9% from 2024 Q1, with the number of transactions increasing over the previous quarter, and roughly on par with 2024 Q1.
- 2025 Q1 small business acquisition values increase 9.4%% over 2024 Q1!
- 2025 Q1 average business transaction values increase by 10%
- 2025 Q1 Manufacturing Business Values Surge by 54% on the Onshoring Trend!
- Median Financial Performance Up Across All Industries Overall, but Retail and Restaurants are down
- Median Asking and Selling Values are Trending Up, but again, Retail and Restaurants are down
Note: The BizBuySell Insights charts below include data for all transactions, which include a wide variety of businesses ranging from main-street businesses to manufacturing companies.
2025 Small & Mid-Size Business for Sale Outlook
The overall small and mid-size business for sale market is showing solid performance and resilience in the first quarter of 2025, with only the retail and restaurant sectors showing weakness.
Buyers are entering the market in record numbers, with 65% indicating they are not delaying their acquisition plans and only 20% holding out for potential interest rate cuts.
Interest rate cuts are highly unlikely in 2025 with the Fed carefully watching for signs of inflation driven by tariffs, while also watching for indications of a slowing economy.
Business Buyers and Sellers Cautiously Pushing Forward in 2025
The uncertainty of the impact of tariffs, risk of inflation, and recession is weighing heavily on buyers and sellers, but thus far, both remain undaunted. 60% of buyers in BizBuySell’s survey say they are undeterred in their search for a business, with 10% saying they have accelerated their search. 75% of buyers indicated they are looking for stable, recession-resistant businesses, and 54% are looking for a thriving business, with just 21% looking for under-performing businesses. Profitability is the top priority for 49% of buyers, followed by growth potential with 12% of buyers.
Small & Mid-Size Business Performance Solid in 2025 Q1
Small & mid-size business financial performance is up overall, with manufacturing showing a surge in financial performance and business value. Retail and restaurant sectors were the only businesses showing weakening financial performance.
- 2025 Q1 Manufacturing transaction values were 12% of total transaction values, with manufacturing transactions representing 7% of total transactions.
The explanation is two-fold and straightforward:
1) The population of retail businesses is huge in comparison to the population of manufacturing businesses
2) Manufacturing businesses tend to have higher revenue and earnings, plus sell for higher multiples than retail businesses.
Historical Median Revenue & Cash Flow of Sold Businesses
- Manufacturing median cash flow is outperforming overall industry averages
- Overall median cash flow is trending up
Historical Median Business Sale Value vs Asking Price
- Overall median Sale Price and Asking Price trending up over the past 2 quarters
- Manufacturing median Sale and Asking prices surged in 2025 Q1 after a drop in 2024 Q4
- Retail & Restuarant Sale and Asking Prices fall in 2025 Q1
Update on Fed and SBA Interest Rates
Following the January 29th, 2025 Federal Reserve meeting Chairman J Powell announced the Fed Funds rate will remain at 4 1/4% to 4 1/2% for now to ensure inflation continues to move downward toward the target of 2%. At subsequent Fed meetings in February, no changes in monetary policy (interest rates) were discussed, and it seems there will be no further interest rate reductions until inflation figures move downward and concerns about the potential impact of tariffs and federal workforce reductions are alleviated.
During Chariman Powell’s press conference on March 7, 2025 he stated “Despite elevated levels of uncertainty, the US economy continues to be in a good place,” and further rate cuts are on hold until there is greater clarity on the effects of tariffs on the economy.
Read Federal Reserve Official Press Release January 29th, 2025
Read FOMC (Federal Open Market Committee) Summary of Fed Funds Rate Projection
Link to chart showing the Historical US Prime Rate from 1947 to November 2024
Source data for chart above JP Morgan Chase Historical Prime Rate
While the maximum SBA interest rate is now 10.5%, few lenders are charging the maximum rate due to the competitive lending market. We expect most lenders to offer SBA loan rates between 9.75% and 10.25% variable rates over 10 years. We have one lender offering 10-year fixed-rate loans at 8.1% to 8.5% for qualified buyers and businesses. (these rates vary with the current 10-year treasury rate).
2025 US Economy Projections Updated November 2024
The Deloitte 2024 Q3 Economic Forecast provides excellent insights into the 2025 US economy. Deloitte is projecting slowing, but modest GDP growth in 2025 with increasing GDP growth in 2026 through 2028.
- GDP Growth slowing in 2025, but trending up through 2028
- Housing Starts increasing from the decline in 2021 through 2024, and modest growth in 2025 & 2026
- Fed Funds Rate is projected to continue a downward trend through 2027 and level off
- US Government Spending projected to have steady growth through 2028
- Consumer Price and Employment Cost indexes are projected to continue to show lower inflation in 2025 leveling off to normal levels in 2026.
Read the full Deloitte 2024 Q3 US Economic Forecast
2025 Housing starts are projected to increase slightly with investment in private housing increasing. It is important to note that Housing Starts reflects single-family home construction and does not reflect multi-unit, commercial, or home remodeling construction. Thus, the chart below only shows new home construction trends.
Deloitte is projecting a steady reduction in the Fed Funds rate through the end of 2026 which will result in further rate decreases in the Prime Rate and consequently SBA loan rates through 2026. This is good new for buyers and business owners with variable-rate SBA loans.
Government spending is projected to increase steadily in 2025 and through 2028 which should be good news for Aerospace and Defense contractors and manufacturing businesses.
Consumer Price and Employment Cost index increases are projected to continue to slow from the 2022 peak through 2025, leveling off to normal inflation rates in 2026 through 2028.
2025 M&A and Small-Midsize Business Sale Outlook
Transaction volume (number of business sales) and transaction values have steadily increased since 2023. With SBA loan rates dropping and overall business financial performance improving, 2025 looks to be a good year for owners wanting to sell their businesses and buyers looking for businesses to buy.
We expect industrial businesses such as B2B services, distribution & 3PL, manufacturing, and construction-contractor businesses to have an excellent 2025 for business sales (transaction) activity and values. Service businesses such as Plumbing, HVAC, and Electrical were in high demand in 2024 and will continue through 2025 as a result of increased acquisition activity by Private Equity.
Retail, restaurants, and hospitality businesses are still recovering and not expected to see significant increases in deal activity or valuations, but they are recovering and on a slow upward trend.
What does all this mean for Small & Mid Size Business Sales & Business Valuations?
Business valuations are driven by earnings, specifically Discretionary Earnings and EBITDA. While business revenues and earnings vary, the multiples of earnings (DE & EBITDA) do not change much. Valuation multiples vary by industry type and business size, but within an industry, they don’t fluctuate much over time or with the economy. Thus your company value is determined by its financial performance, and not Wall Street or even the overall economy.
As an example, during the pandemic retail, hospitality, and travel businesses suffered greatly, while construction, manufacturing, and industrial businesses continued to thrive and business sales in these sectors performed well during and after the COVID pandemic.
Businesses with good financial performance throughout 2023 and 2024 and going into 2025 can expect good valuations and good demand if they go to market in 2025.
Businesses with declining sales and earnings will be difficult to sell and if sold can expect discounted valuations.
While the above is always true, it is especially true now because of the economy, interest rates, and general concerns about companies recovering from the pandemic and economic turmoil of recent years.
Connect With Orange County & California Business Broker Experts
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