Buying a Business? Good Deals Are Scant

Many former white-collar workers, flush with severance pay, are dropping the shackles of corporate life and launching or buying their own companies

AFTER only 3-1/2 years at Motorola Inc., packaging engineer P.D. Morrison realized the corporation wasn't his niche.

''I just don't think I was put on this earth to work for someone else,'' the 29-year-old says.

After being transferred from Boston to Austin, Mr. Morrison started a product-marketing business on the side. It didn't catch on. But he didn't give up.

Through a business broker, Morrison bought Hurricane Office Supply and Printing in Austin last November.

The company, which employs two other workers besides Morrison and his wife, is bursting at the seems, he says. He had his biggest day ever in March and says he plans to move to a new location soon.

Morisson made the leap from employee to entrepreneur voluntarily. But widespread layoffs, reorganizations, and mergers, have created an involuntary exodus of thousands of American white-collar workers who, like Morrison, are choosing to strike out on their own rather than find another job.

''An amazing number of people are starting their own businesses,'' says James Challenger, president of the international outplacement firm Challenger, Gray & Christmas Inc. in Chicago.

In the last two years, 15 to 20 percent of laid-off corporate employees went into business rather than hunting for another salaried job, Mr. Challenger estimates. The proportion of wannabe entrepreneurs was only ''6 to 8 percent'' in the years prior to that.

And it's not just displaced workers. Morrison, for one, intended to have his wife run Hurricane. But when a key employee quit -- to start his own business, as it happened -- Morrison decided to leave Motorola to fill the breach.

''We are living the same lifestyle and bringing home the same money'' plus plowing excess profits back into Hurricane, Morrison says. ''I feel I made the right decision.''

Even recent college graduates are shunning the first rung on the corporate ladder to run their own business.

''We get a lot of calls from kids just graduating from [the University of Texas],'' says Carl Monnin of Corporate Investment International, who matches business buyers and sellers in Austin. ''They don't even want a job. They want to buy a business.'' And each week he says he hears from one or two more executives ready to bail out of Austin's high-flying computer industry.

Financing the dream

Former white-collar workers, flush with severance pay, can often afford another option -- taking the helm of a going concern. Morrison, for example, followed that route and partially financed his office-supply company with a $65,000 loan from the Small Business Administration.

It's not unusual for corporate executives to leave with severance packages of more than $100,000, says T.C. McAfee, owner of Benchmark Company, another Austin business brokerage.

But many people finance their business adventures primarily by taking out a second mortgage, the experts say, except in Texas, where the practice is illegal.

Challenger advises his clients to go into a business they know. He recalls a gluemaking expert who decide to parlay his knowledge into his own business. His basement lab has since become a full-fledged factory.

To evaluate a business that is for sale, Mr. Monnin advises clients to consider the seller: Is he or she running the business right? If so, chances for growth are few. Is the owner selling out for a nonbusiness reason, such as retirement plans, burnout, health, partnership dissolution, or divorce? Those reasons are more attractive to a potential buyer than, say, if a giant, well-financed competitor just opened nearby.

Be choosy. Monnin says buyers want a business that makes money and is priced right, which eliminates the majority that are for sale. ''Deals are scant,'' he says.

Industry advisers agree that most people should steer clear of those too-good-to-be-true, multi-level marketing ventures that appear in classifieds such as: ''Area millionaire looking for five entrepreneurs who want to make serious money'' or ''Invest $200, Earn $14,400/wk potential.''

A buyer should look at a business not as a building, equipment, inventory, and so on, but as an income stream, Monnin says. The price could range from 1.5 to five times cash flow, with more reliable income commanding a higher price. Two to three times cash flow is more typical.

Mr. McAfee says $100,000 can buy a business that returns $50,000 a year.

Here's how: The sale price is $150,000. Half is paid up front. That leaves the purchaser with $25,000 for operating capital. The $75,000 debt is repaid over five years at two percentage points above prime rate, or about $18,000 a year. The annual income from the business should service the debt and leave $50,000 for the new owner.

Sure the return is bigger than on a 5 percent certificate of deposit, Monnin says, but so is the risk. And the owner has to put his or her time into running the business. Effort alone isn't enough to succeed, which is why half of start-up businesses fail within five years. Entrepreneurship isn't for everyone, the experts say.

''I love to find people who have been fired several times,'' Monnin says. Not for being incompetent, but ''too smart for their own britches,'' he clarifies. Natural entrepreneurs are chafed by the leg irons a corporate structure places on their creative potential.

Challenger says he looks for sales-oriented people younger than 50. ''If you're not willing to look at yourself as a salesman, you might as well forget it because you're not going to make it,'' he says. Most entrepreneurs have to sell by day and run their start-up business by night. Challenger says he doubts that people older than 50 will want to put in those hours.

No safety net

Starting your own business also means no safety net.

Christian Seger recalls being ''terrified internally'' at going into business, a route ''not made any easier by my wife's fears.''

But the former vice president of marketing for Chiles Offshore, a now-defunct Houston drilling contractor, left his job with three months' pay in 1987. At the time, the oil industry was reeling, and he didn't want to work under a boss in a different industry.

Six weeks after leaving Chiles, Mr. Seger founded Record Masters, which provides off-site storage for hospital records. The new venture suited him because the health-care industry was growing and he would be selling to other businesses.

Starting off, Seger had little cash, so he survived through ''adroit use of credit cards'' and just making do. ''It's phenomenal how long I got along on a 286/640k computer with a dot-matrix printer,'' he says.

Since then, Seger had to fight a legal battle to end his franchise when the franchiser failed to provide promised software. And when he lost a major customer in 1994, he learned what it was like to lay off employees. He says his income did not equal his old salary for six years. But in the end, Seger says, ''I love it. I'd find it difficult to go back.''

Still, entrepreneurship is not a one-way street, Monnin points out. ''People get into it, and three to four years down the road they burn out.'' He advises buyers to ''be thinking of your exit before you buy.''

And that means buying a business that can be sold easily. Mundane, generic businesses -- dry cleaners, filling stations, food and beverage establishments -- move the fastest.

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