Mom-and-pop ventures don’t typically generate huge revenue figures, but small businesses with positive cash flows are a hot commodity in Los Angeles right now.
There were more than 1,200 lower-market deals in Los Angeles County in the first quarter alone, accounting for approximately $370 million in transaction value, according to data from small-business brokerage BizBen. Those numbers include sales of small businesses from pizza parlors to gas stations, convenience stores to vape shops. The typical deal size fell in the midsix-figure range, according to BizBen founder and President Peter Siegel.
The first-quarter numbers are up from the previous quarter by 4.1 percent and year to year by 4.4 percent.
Siegel attributed the uptick to several factors, including: Baby boomers feel comfortable about their retirement savings and the stable stock market, which has led them to explore selling their businesses. In addition, a strong real estate market also creates home equity that some younger entrepreneurs utilize to get small-business loans, which in turn creates buy-side demand.
“There’s a convergence of all the right factors for both buying and selling at once,” he said. “Entrepreneurs have more optimism than pessimism right now.”
This upswell in optimism about small-business prospects has been bolstered by President Donald Trump’s promises to cut back on regulations and taxes, leading to widespread confidence in the market. According to a national study of small-business owners released in March by Wells Fargo & Co. and Gallup Inc., 71 percent of those surveyed said their financial situation was positive. That’s the highest number reported by the bank since the fourth quarter of 2007 – before the Great Recession.
An overwhelming majority of small businesses also reported cash flow and revenue were increasing and expected the trend to continue for the next 12 months, according to the survey.
Showing positive cash flow is an important factor in dealmaking, according to Michael Wildeveld, Ryan Clark, and Robert Rodriguez, who sell lower-middle-market businesses through their West Hollywood brokerage, Veld Group.
“A lot of buyers are looking for that sweet spot, a business with $250,000 to $1 million in annual cash flow,” Clark said. “Once you get under the $250,000 threshold, things get a little drier.”
The cash-flow component is important because many buyers are new entrants into the small- business world and are transitioning from salaried positions. They also have expenses such as mortgages and kids’ college tuition payments.
“Oftentimes the buyer is someone exiting a corporate job who’s been there for a while, is financially secure, but wants to get out,” Wildeveld said. “They don’t really want to start their own business from scratch, but they need some cash flow.”
Wildeveld and Clark said they’ve seen lots of recent interest in Los Angeles for backing light manufacturing companies and restaurants.
The brokers helped finalized a deal for a package of four downtown bars – Sixth Street Tavern, Spring Street Bar, Library Bar, and Beelman’s Pub – on behalf of seller Acme Hospitality Group to Burbank’s Artisanal Brewers Collective, the company led by Golden Road Brewing co-founder Tony Yanow. Veld also helped consummate a separate deal for downtown’s L.A. Café. Both deals closed last month for undisclosed sums.
BizBen’s Siegel said in addition to buyers exiting the corporate world looking for an established business, there’s also been an uptick in younger buyers who have been a part of a successful tech company exit or have parental backing.
“We used to see a lot of people in the 35-to-45 range, but now there’s a shift to the 55-and-up demographic and those on the younger end of the spectrum,” Siegel said.
Risky business
While market conditions are good for small businesses, there are some downsides to buying right now, according to Wildeveld and Clark. With the cost of renting real estate skyrocketing in most parts of Los Angeles, many businesses are feeling the squeeze, especially those with thin profit margins.
“Business buyers, especially restaurateurs, they’re dreamers, and landlords are preying on that a bit,” Clark said. “Unless you’re really hitting it out of the park, 75 percent are probably going to fail within two to three years.”
And while the rest of the country could see breaks on regulatory oversight thanks to Trump’s economic policies, California is trending in the opposite direction with rising minimum wages and labor-friendly workers’ compensation laws.
A survey by Bank of America Corp. of 300 small businesses in Los Angeles released this month also revealed some anxiety on the part of small-business owners. The study showed area entrepreneurs were the least optimistic in the country when it came to 2017 revenue predictions, with only 49 percent expecting their business to generate more money over the next 12 months.
But with sellers motivated to get out and buyers high on opportunity, Wildeveld said he expects the market to remain frothy for the foreseeable future.
“It’s the best we’ve seen it since 2002,” he said. “There are lots of buyers out there looking for cash flow and lots of people who have that. It’s a fantastic time to sell.”
