Corporate Refugees Fuel Hot Market for Small Businesses
By ANTHONY PALAZZO
Ajay and Sheri Patel have cut the cord for good.
Ajay, a 40-year-old project manager working in the oil industry, and Sheri, 36, a software industry trainer, culminated years of saving and planning with the recent purchase of their own business.
It’s a huge risk, one that will cut the Patels’ combined income by 35% initially, and eliminate the usual corporate perks like health benefits and company retirement contributions.
The Patels borrowed an amount of money they won’t disclose to fund the purchase of Mil-Bar Plastics Inc., a small Santa Ana-based plastic injection-molding company.
“This was a goal that we had for a very long time, since we got married,” Sheri Patel said.
Despite the down economy, and sometimes even because of it, more people like the Patels are exiting corporate life to run their own businesses. Unlike mergers and acquisitions activity, which has been falling in the past two years, purchases of small businesses,commonly defined as having sales of $2 million or less,are up.
The market has been stoked by corporate refugees who are attracted to small businesses for a variety of reasons,recent layoffs, the desire to control one’s destiny, perhaps even to escape the rat race. They’re being aided by low interest rates, which allow them to borrow money against their homes, or they’ve cashed out of the stock market and are looking for new places to put their money.
“We have more buyers than we know what to do with,” said David Silber, a business broker with Sun Belt Business Brokers in Torrance. Business brokers are licensed real estate brokers who specialize in small-business transactions.
Through Oct. 1, the number of small businesses sold in 2002 surged 15% in California, to 9,865, said Peter Siegel, director of California Businesses for Sale, a publication that lists and tracks business sales. In Los Angeles County, sales also rose by 15% and made up 18% of the statewide total. Orange County’s sales make up about 13% of the total.
The volume of small-business sales are among the highest in the 10 years he’s been tracking them, Siegel said.
Mergers Down
By comparison, the number of traditional mergers and acquisitions involving Los Angeles County companies fell by 18% in the third quarter, according to Mergerstat.com. Statewide, the number of mergers and acquisition deals fell by 3.6%.
Small businesses aren’t immune to the ups and downs of the economy. Silber said he’s seen companies being taken off the market in the past year. However, small business owners often have less flexibility in the timing of a sale, for reasons of health, age or other circumstances, and that’s creating opportunities for buyers.
Owner Vanessa Ly, for example, has listed Monarch Cleaners in Monrovia for sale for $190,000 on an Internet listing service. The business has been established for 30 years, Ly said, but her partner’s gambling problems are forcing her to sell.
In the Inland Empire, Lynn Loughmiller is putting together a Small Business Administration loan to purchase a two-person company that manufactures a part used to make automotive radiators. An elderly man runs the company, said Loughmiller, who believes he can increase sales that have been running between $200,000 and $250,000 annually.
“It’s an old man who really has had no desire to grow it,” Loughmiller said. “I can see the potential of what it can become.”
Even so, Loughmiller,who started and ran his own software business in Salt Lake City,understands the risk. His first business failed after its two only customers, software games publishers, stopped using his services during the 2001 industry downturn.
Loughmiller made enough money during the good times for a nest egg that’s seen him through unemployment, but for his encore he looked for something that would have a steadier customer base.
“Some days I wake up with the jitters, and the only way I can get over it is to pore through the books and make sure every thing is the way it’s supposed to be,” he said.
The company being purchased by the Patels makes the plastic holders for cloth military bars worn on the uniforms of soldiers. Ajay Patel, who enrolled in an MBA program two years ago in preparation for this move, said he sought out a business that had steady contracts that would see it through the downturn.
Once the economy improves, he said, he will try to expand the product offering. “You look for a business that has a steady income that covers your expenses and your outgoing (pay), and you say, does this business have the opportunity for an upside.”
Palazzo is a staff reporter with the Los Angeles Business Journal.
