Buying a business requires research, patience

Yorba Linda resident Dave Edmondson has bought both houses and a business.

A home purchase is a snap, compared to a business, he said.

"With a business you have to look at many, many variables," he said. "You have to validate everything: the financials, the customer base, the markets, that the industry is going to be healthy in the future, employees."

In 2005, Edmonson bought Cleanmore Maintenance, a Southern California cleaning and repair service, with the help of Bill Grunau, president of Pacific Business Brokers Inc.in Brea.

It took about eight months.

He says now that if he were to go through that process again, he would do even more due diligence.

While millions of Californians flirt with the idea of buying their own business, only about one in five who go shopping actually completes the purchase, according to the International Business Brokers Association. If you're thinking about buying your way into business, you can increase your chances for success if you understand the challenges.

"Really understand what you want in general like a restaurant or manufacturer and how much money you can put down," said Peter Siegel, owner of BizBen.com, a California businesses-for-sale Web site. "Any ambiguity shown to brokers or sellers and they will pass you by. Most brokers will only work with people they think are serious."

According to BizBen.com the number of Orange County businesses that sold in August was the highest since April, after July sales plunged 43.6 percent from July 2006.

Are sales of small businesses that volatile or is the market rising or hitting a blip in a longer term slide?

Two economic factors are clashing in the buying and selling of businesses right now.

When companies are laying people off and the job market is weak, people without jobs are more likely to buy businesses, Siegel said. Some of that is occurring because of the housing and mortgage industries struggle.

However, business broker Grunau said sales are also affected by interest rates. "Two years ago (U.S. Small Business Administration guaranteed) loans were at 7.5 percent; now they're at 9.5 percent to 10.25 percent."

With costs going up sales might slide or, more likely, sellers will have to help finance the deal, he said.

Although brokers like Grunau have the same license that residential real estate agents do, few sell both houses and business, he said. A business sale is much more complicated.

The two industries differ in another significant way, he added. In about three-fourths of home sales, the buyer and seller have different agents. In eight out of 10 business sales, just one broker is involved.

"Businesses are so complicated that it's hard to sell someone else's listing," said Grunau, whose office is a franchise of VR Business Brokers.

Many buyers want to get a third party valuation of a business before buying. That can cost $1,000 to $7,000, depending on the business, Grunau said, "and beware of business valuation scams."

BizBuySell.com, a nationwide business listing Web site, and the Wall Street Journal, have just introduced a free online tool to figure out approximately how much a business is worth, based on completed business sales on the site.

Most business sellers think their businesses are worth a lot more than they are.

The amount can vary, depending on the type of industry and the strength of a specific business, Grunau said, but the overall market average for the past 20 years has been the seller's discretionary cash - that is the total cash benefit the owner realizes from the business - multiplied by 2.37.

How that cash benefit is determined is just one of the tricky parts of researching a business purchase.

"There's no perfect business," Grunau said. "Most small businesses don't have perfect books and records. Maybe the business needs better procedures or better employees."

Once the buyer and seller come to terms "always go through escrow even if a broker isn't involved," Grunau said. "The escrow company will do all the legal notices to creditors. If you don't you may have a fight on your hands even years later if creditors come calling."

One of Grunau's clients bought a print shop and two years later received a notice from Visa that the previous owner owed $10,000 on a credit card in the business name.

"Because the sale had gone through escrow, the buyer didn't have to pay," Grunau said.

Contact the writer: 714-796-7927 or jnorman@ocregister.com


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