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Though talk of recession and caution on the part of lenders are adding to the challenges of entrepreneurism in 2008, concerns about an unstable job market seem to be sending more people out on the hunt for a way to support themselves.

"We're definitely noticing more buyers right now than we had a year ago. My feel is it's probably in the range of 20 percent more," said Charles Milam, senior broker at SunBelt of the Triad, who specializes in the sale of businesses with less than $20 million in revenues. "It's a seller's market for quality businesses."

Broker Zac Johnson at Triad Business Brokerage in Greensboro specializes in companies under $1 million in revenues and is also seeing strong activity this year, and he welcomes it after a tough 2007, he said. He's sold four businesses since January and has two more under contract. He sold just seven total last year.

Johnson can't say for sure why his business is up while the economy is down, but he wouldn't be surprised if they're related.

"In my opinion, there are a lot of people who have been laid off or taken early retirement, and now they're looking for that entrepreneurial opportunity they may have always dreamed of," Johnson said.

The quality of a business for a buyer is often a function of its revenues and cash flow. There is limited financial data available for small private firms, but there is some indication that the cost of buying a business is on the way up in the Triad.

Online marketplace BizBuySell, which lists about 40,000 small businesses for sale nationwide, said that the median asking price among its active listings in the first quarter of this year was up in both Winston-Salem and Greensboro/High Point. In Winston-Salem, the asking price went from $360,000 a year ago to $395,000. In Greensboro/High Point, the median rose from $135,000 to $220,000.

However, in terms of the value the buyer is getting for that money, the data is mixed. Two basic calculations used to judge the worth of a business for sale are the asking price compared to revenue, and compared to cash flow. When sellers demand higher multiples, they're asking for more money for each dollar of revenue or cash flow.

In Greensboro/High Point, the average multiple of revenue increased from 0.78 to 0.81 over the year, while the cash flow multiple increased from 2.65 to 3.11.

In Winston-Salem, though, those multiples actually fell, from 4.82 to 3.63 in terms of cash flow, and from 1.65 to 0.8 in terms of revenue.

The data does not include actual selling prices because closed transactions are not always reported, the company said. The local market sample sizes increased in 2008, according to BizBuySell General Manager Mike Handelsman, which means the more recent numbers are probably more reflective of the overall marketplace. But he said both asking prices and the cash flow and revenue multiples were fairly stable nationwide.

"That's notable in the current economy, where people are saying business conditions aren't very good, and buyers are having a tougher time getting credit," Handelsman said. "That means the challenges in the overall economy are not yet being reflected" in the small business market, he added.

Giving it a go
Sometimes the entrepreneurial impulse strikes independent of the economy. That was the case for Mark Stone, who survived a number of layoffs as an executive with Hanesbrands before leaving the corporate world voluntarily to buy Carolina Septic in December along with a business partner.

Buying the three-person Kernersville septic tank and grease trap-pumping business was a definite shift in career track, Stone said, since he's now riding a pump truck with his crew rather than jockeying for a spot on a corporate ladder. It took about two and a half years to find the right opportunity, and he said it only worked because his partner kept his corporate job so the pair could qualify for a bank loan.

Stone said he looked carefully at the cash flow multiple before making an offer on Carolina Septic, and was also impressed by the recession-proof nature of the septic-pumping business. That was more important that the relatively unglamorous nature of the work, he said.

"You hear people say, 'Do what you love and you'll never work a day in your life,' and that's great. But you'd better love something that makes money," Stone said. "Platitudes only work to a certain extent."

Stone said the first few months of business ownership have gone well. His income has stayed about the same, and though he isn't getting the same corporate perks and benefits, he said that building up equity in a growing business is more valuable in the long run. The company will soon be taking delivery on a new pump truck, expanding its small fleet by a third.

Potential business buyers should heed the two main pieces of advice they'll hear, Stone said. Be extremely thorough in your due diligence, and however much cash you think it will take you to get started, double it, and have more available if you can.

Sellers who want to take advantage of the current market should also be careful, advised Milam, the broker at SunBelt of the Triad. They'll get the most return if they can show buyers a strong revenue and cash flow position, and in some cases it will be worth staying in business a few years longer to improve the numbers.

"There are warts on every business. Even Google has warts," Milam said. "Try to look at those warts and see if there are solutions that can minimize them, and enhance the positives."

Copyright © 2008. Business Journal.