Sales of companies suffer a sharp drop
Sales of retail shops, restaurants, beauty salons and other small and medium-size businesses in Los Angeles County are down by almost a third in the first six months of the year compared with the same period last year, according to BizBen.com, a San Ramon, Calif.-based clearinghouse that lists small, private California businesses for sale and reports statewide sales data.
The 30.2% decline, to 2,968 L.A. businesses sold in January through June, is more than double the statewide drop of 13.7% in the same period. Some 11,654 California businesses have sold this year.
In Orange County, 1,274 businesses sold in the first six months, down 22.6% from the year-earlier period. San Bernardino County experienced an 11.9% drop, to 651, and Riverside County sales declined to 391, a 47.3% plunge, according to BizBen.com. (San Diego was a Southern California exception: Sales jumped by more than 50%, to 1,275.)
Business brokers blame the sharp drops on the credit crunch. Banks began to tighten credit standards last summer for the government-backed loans that fuel the purchase of many small businesses.
Last year, BizBen.com President Peter Siegel helped close $20 million to $30 million worth of loans each month guaranteed by the Small Business Administration. This year the monthly average is $3 million to $7 million, he said.
“It’s a dramatically different paradigm,” Siegel said.
Declining home equity has also made it harder for potential business buyers to obtain loans for down payments on businesses.
The most recent sales peak was in 2006, when 14,761 small firms were sold statewide, including 4,983 in Los Angeles County, according to BizBen.com. The site now has about 9,000 businesses listed for sale statewide.
Most businesses in the database sell for $3 million or less, Siegel said.
The data are collected from business owners and brokers, including activity on Siegel’s website, as well as county recorders.
Steven Benson, who owns a VR Business Brokers franchise in Huntington Beach, doesn’t need a database to tell him sales are off.
He has seen area sales drop by 20% to 25% from last year. The decline began about 18 months ago, he said.
As loans have dried up for buyers who can’t meet tougher credit requirements, prices have pulled back too.
“Two years ago, it was definitely a seller’s market and sellers were demanding high prices. Today it’s swung the other way,” said Benson, a 30-year industry veteran who is on the board of the California Assn. of Business Brokers.
He urges sellers to price their businesses realistically and be open to lending potential buyers the money they need.
Brokers said the credit crunch was having less of an effect on sales of the smallest companies -- those with a price tag of $100,000 or so -- because those sales often don’t involve SBA loans.
The median asking price for small businesses in Los Angeles and Orange counties is $225,000, the same as a year ago, according to BizBuySell.com, which has 4,363 local businesses listed for sale.
The website’s national numbers are better. For the 2,098 reported sales from April through June this year, buyers valued businesses slightly higher than in the same three months last year.
One simple indicator: For every dollar of revenue, buyers paid 69 cents in the second quarter this year, compared with 64 cents a year earlier. (These so-called gross revenue multiplier figures vary by industry.)
Buyers are getting pickier, looking more closely at a company’s cash flow to see how it will fare in a slow economy, brokers said.
So far, that hasn’t killed many sales, Benson said -- unlike during the early 1990s’ recession, when potential buyers who got a look at the books were often turned off by slumping sales and profits.
Mike Handelsman, general manager of San Francisco-based BizBuySell.com, a unit of Loopnet, said some owners are holding off on putting their small businesses on the block to avoid selling in a downturn.
“They are going to rely on what they sell the business for for their retirement in a lot of cases,” he said.
Meanwhile, increasing corporate downsizings mean more potential buyers holding severance packages or willing to tap retirement savings, he said. “We think there is still a pretty robust demand for small businesses.”
Demand is always high for businesses with sales of several million dollars with good cash flow.
“It’s slim pickings,” said John Sapone of Yorba Linda, who has made an offer on a plastic reel and spool manufacturer in Riverside County.
Sapone, who sold a small valve maker for about $1.3 million this year, expects no trouble landing another SBA loan.
“There is still financing out there for good, creditworthy buyers and businesses,” he said.
Siegel predicts that some without sterling credit will be allowed back into the market by the end of the year as credit loosens and sales rebound. If the Beijing Summer Olympics and the presidential elections pass smoothly, he said, a “feel good” effect will probably help buyers get the money they need, and could coax out reluctant local sellers.
Benson agreed that once the credit and housing markets stabilize, “we will be back to where we were before.”
And in the meantime, the business broker said, for those who can afford to make the leap “it’s a very, very good time to buy a business.”