ARTHUR PERRONE, Partner, Eureka Management Team
With the recession, you’d think the last thing a struggling business would want to do is take on the added burden of buying another company. But Arthur Perrone, an expert on buying businesses, says this is the time to buy. With the recession, prices are low and owners are more than willing to bargain. Perrone, a partner in the newly formed Eureka Management Team in Newport Beach, advises displaced executives and current business owners on mergers and acquisitions. He spoke recently to Times correspondent Ted Johnson.
Why would an entrepreneur, especially during a recession, want to buy now?
It’s a good time for that person to buy to take advantage of the changing market. In terms of starting a business, someone has to be very careful. Usually, there is a longer time commitment on a start-up, and usually it is difficult to determine the amount of cash that will be required. I would look to buying (an existing business). It’s usually cheaper and faster to buy than to build. There’s less risk.
Who are the buyers?
We’re seeing more and more small- and medium-sized businesses are becoming more aggressive in buying. Secondly, we’ve created this pool of talent of corporate executives who have been displaced by the restructuring. We’re seeing not only the people who have left, but also the people who are there who are looking at business ownership as their alternative. They are disillusioned, they have been frustrated or discouraged by what is going on.
What about a small- or medium-size business that is downsizing? Why would they want to buy another business?
We are seeing industries being restricted or being restructured. Companies that are tight, obviously in the aerospace industry, are looking to move into the consumer market. Companies that are tied into the construction industry or the housing industry are looking toward other areas, such as building management. Then, once they are managing properties, they ask what other products can they offer. They might have a captive market in a 30-story building, so now maybe they are looking at opportunities to provide telephone service, or maybe provide insurance service.
With banks so tight on credit, how are these companies supposed to finance an acquisition?
There are several things that are happening. The commercial banks really are not aggressively lending; creating I feel a capital shortage for small- and medium- sized businesses. The bank up the street is not going to be as available to them as it was before. So they have to expand their network of financing sources, look at a lot of non-banks, financing companies.
What about other financing options, such as joint ventures?
That’s going to really be a relevant subject for the ‘90s: business combinations, joint ventures, licensing agreements. We’ve seen it with large corporations that have been developing international opportunities. We are starting to see it develop with small- and medium-sized companies. Not just on the manufacturing side, but also with financial service companies and management consulting companies. The objective is to afford a wider range of services and expertise to a client. The consumer and the client in the ‘90s will be more selective. Two companies might be tied to an industry that is going through difficulties. They are better served by forming a merger and reducing overhead and duplications and wind up with one healthy company as opposed to two struggling companies.
What sectors would you recommend an entrepreneur or small business owner look into buying?
You can start right here in California and Orange County in the health care field, especially more services being brought into the home. There also will be growth in anything that you can do to reduce administrative costs. There’s also the elderly population, anything that will provide independent living, assisted living or food-service preparation.
We’ll see the home expanding in the 1990s to be more of an entertainment area. I can just see us connecting from the television set into the universities and having courses being taught in the home.
Staying healthy, the country is preoccupied with that. What we will see in the future is fish being raised on fish farms. We’re going to see more organic food. We’ll see vegetarian-type fast food places. We’ll see more and more engineered types of foods. Travel will be more related to health with exercise, spas, those sorts of things. Products more directed toward keeping us younger, making our skin look fresher.
But if I had one thing to say about where there will be an opportunity, it would be education. There probably will be more need for tutoring, or training the work force, just in the area of providing training in English and in computer skills.
What sectors should they stay away from?
One business that I would really be concerned about is the retail business. I mean, what we don’t need is another T-shirt shop. What will survive in the future will be boutique and specialty shops. But the ‘me-too’ shops, they’ve been dead for some time. They just haven’t recognized the burial yet. The competition (in retail) is so great to provide low-cost product. I also would be very careful in the restaurant area, especially in Orange County.
How about nuts and bolts businesses, like metal fabrication?
Those are basic industries that always survive and there’s always a need for them. What you look for there is what makes this business unique. First of all, you look for a business that has been in existence for a while. Why has it survived? What’s its uniqueness in terms of its service, it’s relationship with its client, whatever its track record is? Those are businesses that you can get a good foundation on in terms of their marketplace.
On business owners in struggling industries. . .
“They are going to have to either merge, expand, acquire or redirect, and that’s going to require energy, money and some risk. A lot has to do with how they view their businesses in relationship to their lives.”
On businesses to avoid buying. . .
“Be very concerned about ease of entry into a marketplace, if a competitor can get in very quickly with low capital and low expertise.”
On downsizing in the 1990s. . .
“The theme of the ‘90s is going to be decentralization and empowerment, creating organizations that have more authority and more flexibility to respond to the changing market.”
On finding financing. . .
“You can spend an awful lot of time going from one bank to another bank. But we’re seeing a lot more investment groups, with a lot of money becoming active, looking for opportunities.”
