Tough Economy = Buyers for Businesses

Small Businesses on Discount
By ELIZABETH OLSON
Published: May 27, 2008
To all the usual reasons that small businesses are put up for sale — personal problems and personnel squabbles among them — add economic woes this year. But even as for-sale listings rise around the country, so is buyer interest.
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Julie Keefe for The New York Times
Richard Lightowler sold the nursery business attached to his general store in West Linn., Ore., for a lower price than he thinks he would have received in previous years.
“When economic times get tough and people can’t find a job, they will go out and buy a job,” said Ronald W. Hottes, president of the Business Team, a broker in Torrance, Calif.
The problem, though, for owners seeking to sell their businesses is that prices appear to be softening — a reflection of a variety of causes, among them tighter credit markets, rising costs and fewer customers.
The country’s largest listing site, bizbuysell.com, has 50,000 businesses for sale — up from 43,000 this time last year, said Michael K. Handelsman, the site’s general manager. The number of businesses being sold also rose, to 1,795 listings that closed in the first quarter of this year, a 66 percent increase from 1,081 sales in the same quarter of 2007.
In Gaithersburg, Md., mill3nnium.com reported that businesses for sale on its site had surged in the last year. The site focuses on the metropolitan Washington area, and one reason for the surge was a decline in customers. Those businesses included delis, dry cleaners, dollar stores and gas stations.
“We have 80 to 100 listings, double the number we had last year,” said the site’s owner, Moses A. Zuniga. “Every business is hurting.”
Such sites can give only a snapshot of the market, Mr. Handelsman acknowledged, because “when a listing is removed, we always check to see if it sold, but the broker doesn’t always tell us.”
Several brokers say that buyers typically are people who are retiring and looking for a second act or laid-off corporate executives looking for a business to run.
Retirement, illness, divorce, death — and simple burnout — still drive the majority of owners to sell, but in the rocky economy, some otherwise solid businesses are now having a hard time. Their owners decide they cannot hold out for better times, so they sell for less, business brokers say.
A decline in revenue was one reason that Richard Lightowler decided to sell the family’s retail nursery in West Linn., Ore., in January. When he took over the Willamette General Store from his parents in early 2007, he said, he evaluated the business. He said he found it difficult to manage the adjacent nursery, which specializes in ponds and pond supplies, as well as the store’s growing business in expensive Traeger barbecue grills.
So he decided to sell the decade-old nursery, which had been bringing in $150,000 annually several years ago. Business had slipped even though nurseries generate higher margins than the hardware, barbecue supplies and food that are the core items at the blue-and-white clapboard general store, he said.
“A few years ago — based on how it was doing then — I could have gotten $50,000 for the nursery,” said Mr. Lightowler, 40. “But I had to ask less, about $40,000, and accept $33,000.”
Phillip L. Beukema, of Luxemburg, Wis., who recently sold his online business, Corporate Apparel Unlimited, may have been luckier in his timing. Over the last eight years, he and his family built the company, which sells promotional items like T-shirts on 13 Web sites, with some 25,000 clients, and recorded $2.8 million in sales in 2006.
Then he and his wife, Charla, both 55 years old, decided last August that they wanted to retire. So last fall he listed the company with a business broker, Cornerstone Business Services, in nearby Green Bay, and the transaction — he did not disclose the sales price — closed on Feb. 15.
The price, said Mr. Beukema, a former college dean, would probably have been less if he had tried to sell this year.
“As the subprime situation hit last year, we noticed about a 10 percent slide in orders,” he said. “So if we had put it on the market in January, the asking price would have been in jeopardy. I don’t think we could have gotten the same figure for it.”
Pinpointing what is happening to sales prices nationwide is difficult because data is diffuse and unreliable. It is possible to advertise nationally on a Web site, but the buying and selling of most small businesses remains local. And most transfers of small businesses are between individuals, who are not required to register such transactions.
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But both listing sites and brokers around the country say that sellers have become more flexible about price. In a survey by the International Business Brokers Association of its 2,000 members, nearly 73 percent predicted that 2008 would be a buyer’s market. The survey was released in January.
Cress S. Diglio Sr., the association’s chairman and president of Corporate Investment International, which is based in Orlando, Fla., said that “this year the number of sellers will easily outpace the number of qualified buyers.”
One reason is that a crucial small business financing tool, home equity lines of credit, has been drying up as house values fall. Traditionally, small businesses have had a hard time obtaining commercial credit, and that is worsened in rough economic times, several brokers said.
“A year ago, people were using home equity loans,” Mr. Hottes said. “And now they are drawing down their 401(k)s.”
Sellers — who historically have provided financing to sell their small businesses — are doing so more than ever, said Julie Gordon White, chief executive officer of BlueKey Business Brokerage in Point Richmond, Calif.
Even so, an unpleasant truth is that many, if not most, businesses do not sell. For decades, the conventional wisdom was that brokers sold about one out of five businesses they listed. But a new study by Louis O. Vescio, owner of Sunbelt Business Brokers in Melbourne, Fla., found that the percentage was only 10.5 percent.
The main reason, Mr. Vescio and others said, was that “most small business owners keep bad records,” so buyers cannot get an accurate financial picture.
Confidentiality can also hamper sales, brokers said.
“It’s not like a house where you want everyone to know it’s for sale,” said Mr. Diglio, who has been in the business for two decades. “You don’t want employees, customers or competitors to know you are selling.”