[EP 284] Are We In A Buyers Market? The Real Story Behind the Latest Surge in Business Buyer Enquiries

Transcript below!

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Joanna Oakey [00:00:24]:
Welcome back to The Deal Room Podcast, a podcast proudly brought to you by our commercial legal practice Aspect Legal. Now, in this episode, I sit down with Lucia Vuong, head of Seek Business, one of Australia’s largest online business for sale marketplace and one of Australia’s leading economists and chief economic adviser at Judo Bank, Warren Hogan. Now, Warren was the AFR forecaster of the year in 2023 for both interest rates and for the economy, and has done a lot of work on how the economic data connects with business confidence and broader trends in business investments. And so today in this episode, we are digging into some, dare I say it, Data. This discussion includes some incredible insights into the latest australian macroeconomic data, seek Business Inquiry data and their latest marketplace insights Inquiry Trends report. This episode is all about what’s happening in the business for sale market and the story behind all that economic data we’re seeing in headlines, business news and reports. We see hundreds of transactions here at Aspect Legal, so it’s always interesting to see if the data out there matches what we’re seeing firsthand. And guess what? As you’ll hear, it actually does.

Joanna Oakey [00:01:55]:
So in this episode, Warren and Lucia share insights on which sectors are seeing the highest buyer inquiries, emerging buyer behaviors, and some of the economic trends that are impacting the SME market and the buyers and sellers in it. I ask where the widely forecasted cliff of retirees is up to, and we talk through trends, including what data shows when comparing regional versus city areas, different states, and also how population shifts are impacting the economy. We also look at labor shortages, cost inflation, and the impact of technological advancements and how these are shaping business competitiveness. I can personally attest to how connected the volume and speed of transactions are to the SME business confidence and the general economy. And as you’ll hear from Warren and Lucia in their insights report, we see that there is indeed a correlation. So without further ado, here are the latest Deal room insights with Lucia and Warren. Warren and Lucia, I just want to say a huge thank you for joining us today on The Deal Room Podcast.

Lucia Vuong [00:03:10]:
Thanks. Lovely to be here.

Warren Hogan [00:03:12]:
Yep, great to be with you.

Joanna Oakey [00:03:14]:
Fantastic. Wonderful, wonderful. Okay, now, of course, we’re talking about the Marketplace Insights report. What a fantastic report. This is so much interesting data, maybe. How about we kick it off by getting a bit of background on it? Why did you put the report together? What was the reason behind it? What was the thinking?

Warren Hogan [00:03:34]:
I might start and then I’ll hand over to Warren in a bit. But I guess initially at Seek Business, we were looking at what was happening in the market, and the trigger was really the pandemic, some really turbulent times for everyone. But something really strange was happening in the business for sale market, which is in previous cycles. What was happening was when unemployment was high, we would get high volumes of inquiry, which was what happened initially when we had all these lockdowns around the country. And then we expected that to peter out and die down after a while, and it didn’t. And so we’re like, huh? What’s happening? And so we started digging into the data and saw some really interesting trends over a number of years. And at Seek Business, we’ve been around for over a decade, well over a decade. And so we have quite a lot of data, like the report that compares 2022 inquiries data to 2022.

Lucia Vuong [00:04:29]:
The database actually goes back to 13. And so we have over a million and a half inquiries that have been made on our platform across all different types of businesses for sale. And some interesting things started to emerge. And so we started looking at it and we thought, wouldn’t this be great to share back with the industry, with our customers, with buyers and sellers? We thought it’d be great to think about what does this mean in the current economic conditions? So we reached out to Warren and Judo bank and said, hey, do you want to comment on some of our data? Very generously said, yes, sure. And then, actually, I think we got way more than we anticipated from Warren, and I might hand over to him to talk about what the data looks like from his perspective and a wider macro view.

Warren Hogan [00:05:12]:
Yeah, thanks, Lucia. When they reached out, I just did what I thought was the sensible first step and get this wonderful time series, this history, and map it up against official statistics that we use to look at the health of the business community. And voila. We have a data series that actually moves broadly in line with what we more generally know as what’s happening in business. And it’s very highly correlated with overall business trends related to investment in particular, but also surveys of business conditions, like the NAbS survey and the Judo Bank, PMI and business activity. I just kept digging around with ABS producers, heaps of data on this, and some of the purists would say I was data mining, but it’s essentially just an exercise in trying to anchor the data series on business inquiries with the realities of what we know of the business world. And because we’ve got a solid eight years of data, we can see through cycles as well, which is really important for that exercise. And I suppose it then allows us to say, well, what is the data series telling us? Because it isn’t actually business transactions.

Warren Hogan [00:06:24]:
And that really sort of sparked a whole bunch of light bulbs for me, is that we’re actually observing what economists call notional demand, which is something that most people don’t even want to think about. But it’s an important concept in economics, where you’re looking at what people want, rather than what most of the data tells us is the actual transaction is what people get. But of course, what people want is a key indicator of what’s actually happening in the market, the price tension, all this sort of stuff. So this is clearly a fantastic data series from a macro or a broader business analytical point of view, that gives us further insight into the investment trend. And when I say investment, I’m not just thinking about buying some new software or putting another coffee machine in the cafe. It’s actually more fundamental. It’s equity. It’s our people building equity in businesses, and of course, in an ongoing sense, that’s retained profits.

Warren Hogan [00:07:28]:
But it’s really this concept of the health of the business community. So I think it’s a fantastic series. I think, like all of these things, and I’ve been involved in a lot of these, what you might call unofficial data, that is, data that doesn’t come from the ABS over my career. And some of them are the most important indicators that we have in our community, particularly for financial markets, which their whole objective is to try and understand what’s going on now and put it in the price. Whether it’s around expectations for interest rates, the currency, or even potentially in equity, various equity prices. We’re going to have to keep persisting and putting out the report and getting the broader community comfortable with it. But I’m very confident that one day this is going to be one of the more important real time indicators of what’s happening in our business community.

Joanna Oakey [00:08:15]:
I absolutely agree with that. What a fantastic thing you’re both doing here, putting together all of this data and using it to help tell this story. And because I guess we see transactions at the coal face, my perception has always been that this industry, the sale and acquisition of businesses, is so susceptible to. It really moves with business confidence. We really see hiccups in the flow of transactions and the volume of transactions when we have a hiccup in business confidence, or in particular small business confidence, because I think that’s the sort of majority of the data set that we’re looking at here. Right. We’re looking at SME’s in this particular data set, which I think is super important to point out as well. But, and I want to ask some questions on the basis of what I’m seeing and your answers to some that soon, but just from the higher level perspective, let’s just talk about the trends.

Joanna Oakey [00:09:24]:
So what came out of this analysis and what are you seeing as the trends at the moment?

Lucia Vuong [00:09:30]:
So I think one of the key trends is since Covid-19 so since March 2020, really, the growth in inquiries for businesses has grown massively. Like it is an exponential growth that we’ve never seen before in the market. The kind of key kind of location that’s happening in is primarily New South Wales, Victoria, Queensland, NWA, so the largest populated states. I think that the kind of interesting things is how that aligns to what’s been happening in the economy. So Warren can probably speak to that a bit more and what that actually means. So inquiries are going up. That means demand for businesses for sale is incredibly high. I think on the flip side of that, just to talk on supply a little bit, is that it’s been pretty flat from a supply perspective.

Lucia Vuong [00:10:19]:
The number of businesses that we’re seeing advertised is relatively flat over the last few, really over the last decade, but over the last few years in particular. And really if the supply is low and demand is high, that has other implications as well. So I think that’s really interesting. And hand over to our into it.

Warren Hogan [00:10:41]:
Yeah, it’s a really rich data set. So we’re not only just getting this broad view of inquiries and the demanded by businesses, and these are basically small businesses, which I just think it’s worth adding at this point. And I’ve been working with Judo bank for almost four years and been involved in being SME focused really for the last eight years of my career. There’s not a lot of data sets on the SME sector. The commentary you see out there is often dominated by anecdote and the views of experts. And trust me, that’s dangerous. And I’ve looked at, you know, I’ve been trying to understand this thing called the SMA economy through official data, and it is hard because a lot of ABS data is just the business sector and there is some stuff you can get. So the point I’d make is this gives us a wonderful insight into small business conditions and what’s going on in that sector.

Warren Hogan [00:11:31]:
So that’s the first thing I’d say in terms of where we’re seeing it. We’re getting a good read across different geographic regions in particular. And again, something I spent a bit of time on is thinking about the different states, because most SME’s operate in a local economy rather than a national economy, and we do get divergences. And all of what I’ve seen in the data broadly matches up to the narratives that the sort of official statistics tell us. Like right now, in 2024, it’s clear that WA, Queensland and South Australia are doing better than New South Wales and Victoria, and that’s going to continue to be important. I think the other point I’d make is a lot of the economic commentary more generally, and commentary in the media around the state of the economy. The state of business is very much focused on what you’d call a p and l. That is what is a flow, how much people are buying.

Warren Hogan [00:12:21]:
We often forget about the balance sheet and the strength of the balance sheet, the equity that sits there, and obviously the debt side as well. But this is a great piece of data telling us about equity. It’s telling us about rational demand to buy businesses, which is telling us there is equity, both some capital, equity capital, but hopefully some debt capital behind that as well. And of course, that there’s going to be equity in the business sector because people are buying. So what. And I think this major intergenerational shift we’re seeing, which is going to be very important for at least the next decade, business transfer is a major part of that. So all of this is we’re going to reveal more over time as we get better understanding of it. But, you know, the bottom line, if there was a takeaway right now, as we’re sitting here today, is that this data set is telling us that there is a very healthy and vibrant a small business community in this country that I know for sure is under pressure, but it is actually navigating the challenges of our economy ever since COVID and to this day, extremely well.

Warren Hogan [00:13:22]:
And of course, we have an economy that is going to transform itself in the next decade due to a whole range of reasons, from labor shortages to AI to de globalisation. And the small business sector and mid sized companies are going to be agile and able to adapt, in my view. And of course, what we’re seeing here is a strong amount of interest in that sector, and I think that bodes very well for where we’re headed.

Lucia Vuong [00:13:47]:
Yeah, I just want to add to Warren’s point a little bit that equity piece, because typically unseeked business, the business values that are being advertised are on the lower end. So our kind of, most of the businesses on our website are probably somewhere between three to $500,000. And what we’ve seen over the last couple of years is actually those businesses, a million dollars in hire, have grown much, much more than everything has grown. But the million dollar plus businesses, and actually, the higher the value, the more it’s grown. So three to 5 million is the highest growth kind of bandwidth of advertised prices. And so our kind of takeaway of that is that more business buyers are actually small business owners. So these are existing businesses looking for acquisition, for growth. Because how many individuals are actually looking for a 3 million, $5 million business? Probably not that many.

Lucia Vuong [00:14:41]:
What Warren is saying, which is these businesses have equity in order to acquire, in order to grow, which is very exciting.

Joanna Oakey [00:14:48]:
That is exciting. Isn’t that fascinating? That is so exciting. And it’s a great opportunity that for SME’s and I guess they have to get to a certain point and a certain stability to then be in a position to consider acquisitions. So it’s great to see that change in buyers. And when you talk about that, the data showing this in relation to buyers, is it looking like over time, we have more buyers coming in? I think maybe you mentioned something about that, Lucia. And can you see the level of inquiry in relation to, say that smaller level of business versus larger level and how that has changed over time?

Lucia Vuong [00:15:32]:
Yeah, we do believe there are more buyers in the market. It’s not like I can’t give you an exact number right now. It’s not in the report. But the reason we believe this is, there’s a couple of things. So one is because this kind of trigger or transition really happened post lockdowns or during lockdowns. We’ve done a lot of research at. See, this is about the business ownership ambition. So there’s a lot of people in Australia and the world who really want to be business owners.

Lucia Vuong [00:16:01]:
And we’ve got, I think we did a survey in 2019 or something that said 50 or 60% of Australians want to own their own business. And other CGU’s done a report, everybody’s done a report about how many people want to be a business owner. And the number is always massive, but the number of people who actually become business owners is incredibly small. I think the ABs had a 14% or something like that. And so our kind of goal has always been to help people kind of transition that ambition into action. Look, not everyone should be a business owner, but unless you actually take some action, you’re not going to know and you’re not going to progress on your journey. And we just saw this, like, massive shift. And when we started talking to buyers straight after, we saw the kind of increase as well.

Lucia Vuong [00:16:41]:
And a lot of them were like, I’m at a pretty senior management level in my corporate job. I have always wanted to do my own thing, and so now I’m considering whether I should and I think I could run my own business. So there’s that kind of cohort of people that are thinking about career transitions. And then, as I said before, I think there’s a big group of business owners who realize actually if we are resilient through something as shocking as the pandemic, then we probably can be more ambitious and try to grow through acquisition. And so they’re more sophisticated, they know what they’re looking for and they understand the industries that they’re looking at as well. So there’s different groups of buyers. Yeah, so that’s what we’re seeing and what we believe is happening.

Joanna Oakey [00:17:30]:
And what has the data reflected in relation to the differences between, I guess, in regional areas? I recall you both mentioning to me that there was some interesting sort of data that came out in terms of our regional areas.

Lucia Vuong [00:17:48]:
So this will be in the next report, and Warren hasn’t seen this data yet, so I’m actually really keen to hear what he thinks when I share the top level view. So we’re planning to release this on a quarterly basis. So the next report actually does break down regional versus metro. And the way that we define that is really metro for us is capital cities and everything else is regional. And so what we’ve seen, which is really quite interesting, I’ll talk about the three kind of biggest states. So in Victoria, Melbourne, typically for all states, metro areas have always done a little bit better than regional areas. That’s probably because population is in the metro areas and there’s more volume happening. So that was pretty typical before COVID Covid hit in Victoria, regional inquiries started to grow very rapidly, well above Melbourne.

Lucia Vuong [00:18:43]:
And then over time, especially in the last couple of years, they met and are growing at the same rate. So regional and metro Melbourne is growing at the same rate, still quite high growth. Slightly different story in New South Wales and Queensland in that. Let’s talk about Queensland first, which is Queensland saw a huge growth immediately after Covid, both regional and metro areas. Brisbane grew significantly and was well outpacing regional quite quickly. And that trend has continued in that Brisbane is doing much better than regional areas in Queensland, but significantly higher than in terms of growth rate. It’s significantly higher than Victoria, New South Wales. I think the thing with Queensland that’s interesting is it grew very quickly after Covid and then it slowed.

Lucia Vuong [00:19:34]:
So even though, if we just look at the last two years, it doesn’t look like Queensland has grown as much, but really, compared to pre Covid, it has grown very significantly. New South Wales had an interesting period as well because I think the lockdowns in New South Wales initially weren’t as severe, and then they had a few knocked lockdowns and then was back to normal. So the trend is similar to Victoria in that Sydney did really well immediately after Covid, better than the regional areas. And now it’s flipped a little bit in that regional. New South Wales is growing slightly faster than Sydney, but all of it is growing. All three states have grown, continue to grow, and the pace of growth is just different. But whether it’s regional versus capitalist.

Joanna Oakey [00:20:17]:
And when you say grow, you mean buyer inquiries.

Lucia Vuong [00:20:22]:
Is that inquiry volume? Yeah, compared to, let’s say, the same time last year, or even a lot of the trends we publish in the report use January 2022 as the kind of baseline point, if you will, because that’s when things started to settle. Whereas between 2020 and 2022, we were seeing such turbulent times that we wanted to. This feels like the new normal, which is what I think the media term was. And so how many inquiries have grown since then is really a lot of what the report is based on.

Joanna Oakey [00:20:57]:
And so, Warren, what’s your response to these latest insights or data?

Warren Hogan [00:21:04]:
It’s a working experiment in me having a view without seeing the data, and let’s see how it all sorts itself out in the next few weeks. But actually, I’ve been very interested in regional Australia ever since I’ve been working with judo, actually. And what we saw was this sort of flow of people out of the cities during COVID And it was a big question about what this meant. And it was just literally a response to this horrible health issue. But it’s more than that. So we’re seeing a transformation of regional Australia, which is in a really, what you call a development of modern Australia. That is, the last 30 years has lagged the metropolitan areas, and that’s been reflective of sort of immigrant population and various other things. And also probably some key industry in regional Australia coming under pressure, that is manufacturing to a lesser extent, some parts of agriculture, but that’s all changing and it’s all population at its base.

Warren Hogan [00:21:57]:
And that is, yes, there’s been a little bit of a, well, not a reversal of the flows out of other cities from COVID but it’s certainly slowed right down. But actually it’s other flows are happening. And that’s, I think, a really critical report from the, I think, regional Australia Institute. It is showed that it’s not just tree changes and sea changes, and there’s a lot of that still because of this massive Covid baby boomers, but it’s millennials and recently arrived migrants, recently arrived being last couple of years. And so that’s, I think, got to be behind this demand for small business because it’s actually people just going and wanting to live in regional Australia and how do I make a living there? And obviously, starting your own business is a fantastic way to do that as opposed to being reliant on big business or some other business to employ you. So I think it’s all happening. Two of the fastest growing regions in Australia of anywhere, including capital cities, are Geelong and the Sunshine coast. They are at critical mass, so they’re self sustaining economies in many respects.

Warren Hogan [00:22:54]:
And I think following through on this is a recognition, thankfully, by state governments of the need for infrastructure and other investment. This is a big deal, and it’s fantastic news that we’ve got this data set because again, regional Australia, it’s tricky to get these insights into what’s happening to allow people like me to make some comment and views on it and increase our understanding of what’s happening in real time. But I think we’re going to be able to help make a contribution to that conversation as well.

Joanna Oakey [00:23:18]:
I love it. Well, that’s it for this episode of The Deal Room Podcast. I’m sure you will agree that this two part series was full of insights, and if you’re keen to get a copy of the report we’ve talked about throughout this episode, be sure to check the show notes out. You’ll be able to download your copy of the Sick business and Judo Bank Marketplace Insights Report and subscribe. Most importantly, to make sure you receive the next one, I will certainly be doing the same thing. You’ll also be able to find out how to connect with Warren and Judo bank for more insights, as well as Lucia and how to access some of the resources on offer from Seek Business, one of Australia’s largest online business for sale marketplace. And if you haven’t yet, head to the show notes right now to get those resources given the pace of change we are seeing at the market right now. If you are advising anyone who is buying or selling businesses, or of course, if you’re looking to acquire or exit yourself, keeping across trends is absolutely critical right now.

Joanna Oakey [00:24:29]:
So make it a point to seek out thought leaders in the market who are across these trends. Stay ahead of the game. I’ll also throw in there that Aspect Legal has invested heavily in ensuring both clients and advisors have access to high quality resources to help navigate the buying and selling journey, including our vendor finance and employee entitlement deep dives through to our dedicated client resource hub to help step through the business sale contracting journey. This is one area of law where expertise genuinely leads to smoother deals and better results, a view echoed by business brokers we work with across Australia. Our resource hub is a great place to start. Head to the show notes for a link to that now, if you’d like to know more, we’d be happy to point you to specific resources or if you’re buying or selling right now, we’re here to help and we’d love to help you. Just head over to our website at aspectlegal.com.au and there you can organise a free consultation with me on one of your legal eagles at Aspect Legal to help with your transaction. Well, we do hope you’ve enjoyed this transaction and you’ll find our next episode in your inbox shortly.

Joanna Oakey [00:25:44]:
Oh, and by the way, if you haven’t yet, don’t forget to subscribe. So you do. That’s it. You’ve been listening to Joanna Oakey and the Deal Room podcast, proudly brought to you by our commercial legal practice, Aspect Legal. See you next time, ladies and gentlemen.