Five months after he opened PNK Pro Beauty Supplies in Glendale, owner Karhen Abramyan has put the shop up for sale. He’s gotten a few lowball offers in the last few weeks, but no deal.
“I have $60,000 in inventory here, I can’t just sell it for $50,000,” said Abramyan, who is asking $95,000.
Blame the bad economy. Buyers and sellers of California businesses are hampered because the vast pools of money that once fueled sales have dried up.
“This is probably the toughest time that I’ve seen in my 25 years of buying and selling businesses in Southern California,” said Peter Siegel, owner of BizBen.com, an online clearinghouse in San Ramon, Calif., that lists small and mid-size California businesses for sale and reports statewide sales data.
Money is harder to come by as lenders shy away from business acquisition loans, stock market portfolios shrink and the availability of home equity loans disappears along with home values.
Many sellers are suffering because the economy has hammered cash flow, which is a big part of the value of their businesses. That means they can’t get a price as high as they recently might have. Those who have to sell are often forced to accept offers they would not have considered before the recession. Those who can wait have pulled their sales listings.
Others aren’t putting their businesses up for sale at all, hoping to outlast the downturn and get a better price later.
In Los Angeles County, 2,033 businesses sold in the first six months of the year, down 32% from the same period last year, according to BizBen.com. Statewide, 7,793 businesses sold, off one-third from the year-earlier period.
The website has seen its own listings, now at about 8,000, drop 20% in the last 12 months, said Siegel, who culls his data from brokers and county recorders.
Business brokers “are on life support,” said Gary Anderson, a broker and principal at West Coast Commercial Credit & Investments in San Diego.
Sales of Southern California bars, dry cleaners, manufacturers and other small firms are expected by many to continue to fall in the near term.
“In January and February, I personally took probably two dozen calls from San Diego companies whose name I immediately recognized and who had been in San Diego doing business successfully for decades,” said Bill Lange, a VR Business Brokers franchisee in San Diego. “They were saying, ‘I’d like to know if I can sell my business, because if I can’t, I’ll have to close my doors.’ ”
Virtually all of those who called went out of business, he said. “When a company is not doing well, there are no buyers for it,” Lange said. “The whole idea of buying a business is to earn money.”
Some economy watchers had predicted that the recession would be beaten back in part by a wave of new entrepreneurs. Corporate refugees were expected to snap up existing businesses, buy franchises or start new ventures.
That hasn’t happened as often as expected because many people no longer have enough home equity or value in retirement or other stock market accounts to buy a business. Uncertainty over how long the recession will last also is putting a damper on sales of businesses in the state, although brokers see signs of sales recovery in Texas and Florida.
Meanwhile, lenders remain spooked by climbing loan default rates, tougher regulatory scrutiny and the stubborn recession.
“We had a transaction that was approved for financing this week, but that was the ninth bank we tried,” said Rich Schammel, a five-year VR Business Brokers franchisee in Pasadena.
Difficult conditions for the buying and selling of businesses mean more empty storefronts, as landlord Mark Tarlov knows. He seemed to be advertising a pristine-looking sandwich shop for sale in a new building for just $100 in a recent BizBen.com listing. When contacted, he readily confessed it was a guerrilla marketing ploy to find someone to lease the former franchise spot in Corona that was recently abandoned by its owners.
“It’s a shame,” said Tarlov, principal of Tarlov Properties in Sherman Oaks. “I know there was some people interested in buying it, but they couldn’t get a deal. They ended up handing the keys to me.”
Sales of small and mid-size private businesses in L.A. County and California peaked in 2006 at 9,345 and 28,582, respectively, according to BizBen.com data. Easy money and general economic optimism spurred the record volume.
Some brokers are seeing signs of life. Siegel expects a seasonal pickup in sales in the fall, but nothing dramatic.
Even in good times, he said, deals never happen for as many as 70% of small businesses put up for sale. Sellers typically overprice their companies. Buyers often have unrealistic expectations of how easy it is to buy a company.
Siegel suggests that buyers look at older listings because those sellers might be more willing to agree to a reasonable price. To increase chances of a successful sale, Siegel said, more brokers should encourage sellers and buyers to get pre-qualified by a bank.
A seller should be prepared to finance 20% or more of the purchase price, brokers said. Not all business sales require financing, but most larger deals -- those $250,000 and up -- do. Many such loans are backed by the federal Small Business Administration.
The agency has temporarily waived its fees and has increased its guarantees to 90% of a loan’s value to boost loan volume, but those moves have been offset by a change in how much of a company’s “goodwill” can be used when calculating its value for the purposes of an SBA loan.
That’s a critical hurdle for many small-business sales, Lange said.
For example, a business valued at $1 million based on its cash flow that has $250,000 in assets has, by definition, $750,000 worth of goodwill. But the SBA recently capped goodwill at half the amount of the loan or $250,000, whichever is higher. Previously there was no limit, Lange said.
“That means the best of the small-business community cannot be sold with an SBA loan, just those that are not good, that don’t earn very much where the asset value is close to the sales price,” he said. Efforts are underway to revise the ruling.
Abramyan, the beauty shop owner, probably won’t tangle with SBA loan requirements because he’s asking less than $250,000 for his business.
The Glendale resident said he was selling the shop because he realized he’s not a “retail person.”
Abramyan wants to concentrate on one of his other ventures: Orangin, a business selling a fast, compact orange juicer he says he invented for cafes and other outlets.
“You can’t put all of your eggs in one basket,” Abramyan said. “So if you can, put it in a couple of baskets, and eventually one will flourish.”