Needs of Buyers of Existing Businesses Often Overlooked

If we are to believe the prevailing ethos, true entrepreneurial spirit exists in the hundreds of thousands of start-ups founded in garages and spare bedrooms with $5,000 in cash. The myth holds that from such humble beginnings are created mature, profitable companies by dint of the enthusiasm, vision and 14-hour days of their founders.

The preoccupation with start-ups results in an almost religious annual account of newly formed businesses and incorporations as a gauge of business health. Nonprofit business centers focus almost exclusively on start-ups, and many textbooks tell would-be entrepreneurs to examine their hearts and souls to find, and found, their one true business.

In truth, there’s another strong entrepreneurial trend that has been occurring for years. It’s an alternative way for would-be entrepreneurs to jump into the business soup: buying an existing business.

Estimates are that one in four business owners get their start by taking over existing businesses or assets, according to the National Federation of Independent Business.

“Are they more successful than other forms of entry? We don’t know yet,” said William Dennis of the NFIB. “Clearly, they obviously start bigger and generally the larger starts are more likely to succeed.”

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The costs of buying versus building a business often are about the same, said Phil Borden, director of Women’s Enterprises Development Corp. in Long Beach. Borden believes there has been an increase in the number of neophyte business owners purchasing already established businesses.

It is not easy to keep track of the phenomenon of entrepreneurs buying an established business dream. Newspapers and other business publications report only the biggest company transfers of ownership, making it appear that buying a business is out of reach for most working stiffs who lack the $250 million to $1 billion or more needed to buy mature companies. And at that level, the buyer is not a beginning business owner.

Unrecorded are the thousands of smaller transactions where the new-to-business owner gets started by taking over an existing business. Dennis said those amounts are closer to $5,000, according to an NFIB survey.

What kind of business can be bought for $5,000? Very small franchises, minuscule assets and often nothing more than a business name and a list of customers, Dennis said.

“Say I have Denny’s Repair Shop and I sharpen scissors or knives,” he explained. “I’ve got a grindstone and not too much more. I’m ready to retire and somebody offers me $3,000 for my business: the grindstone and the name.”

For the buyer of a tiny business with no prior business experience, it is a true start-up but goes unrecorded as such.

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Also likely to go unrecorded as start-ups are businesses purchased for $40,000 to $50,000 or more whose new owners are equally new to business. Their numbers may be increasing, boosted by laid-off workers who received buyouts, those who have a nest egg feathered by rising stock values, and those who decided to bail out of jobs to try entrepreneurship but not at the start-up level.

Jennifer Stockland, who bought Costa Mesa Florists nearly four years ago, said she didn’t want to wait three to five years for a return on her investment when she decided to leave her stock brokerage job and go into business for herself.

“By buying an existing business, I could get an immediate return,” she said. “I wanted to buy cash flow.”

Although Stockland had loved horticulture as a child, she lacked knowledge of the industry. By buying, she purchased not only the accounts, vendors, assets and operating system, but also the expertise of the employees and the former owner.

“I actually got my best education, I really feel, from my employees,” she said. Under her ownership, the 48-year-old shop has seen sales increase 41% in the last three years.

Mary Schnack, owner of Schnack & Brody Communications in Los Angeles and Sedona, Ariz., who created two successful businesses from scratch--her public relations firm and a sign shop--now says that taking over an existing business is the way to go.

“Your training is going to start at a higher level, rather than working your way up to that level,” she said. “And when you’re calling to introduce yourself as the new owner, it’s not totally a cold call.”

Furthermore, the new business owner, as part of a good purchase agreement, can get business advice from the previous owner for at least six months, Schnack said.

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The entrepreneurial fervor of the new owner may actually boost the business to higher levels.

Nevena Orbach, a consultant who has worked with the Ernst & Young Entrepreneur of the Year Awards, said many of the companies they see doing well received infusions of new blood.

One nominee this year, Anne-Merelie Murrell, acquired Giroux Glass Inc. in 1991, when the company had 11 employees and revenue of $1.2 million. Murrell, who had a teaching and administrative background, didn’t know anything about the glass industry when she bought the company, but has since grown it to revenue of $12.6 million and 115 employees.

Credit is due not only to her hard work and that of her employees, but also to the assistance she received from the USC Business Expansion Network and its FastTrac program. But Nitin Bhatt, USC BEN director, said most centers, even his own, are staffed by counselors and advisors whose skills are better suited to from-the-bottom start-ups.

“Centers need to provide more sophisticated assistance, but we know that to get that type of talent, we need to pay market rate for consultants,” Bhatt said. “Most centers are living from contracts, government assistance and grants and don’t have that type of dollars to buy that type of talent. It’s a big hole in the market.”

Although an army of consultants exists in the private sector to provide assistance, neophyte business owners may be too overwhelmed to figure out how to get the help they need. The nonprofit centers, if properly equipped and funded, would be the logical place to get aid.

But until they can provide that help, it would appear that at least one-quarter of new business owners are not only invisible but also under-served.

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Times staff writer Vicki Torres can be reached at (213) 237-6553 or at vicki.torres@latimes.com.