Customer Loyalty Proves its Value

A strong customer base played a convincing role in Breshkai Berlin’s decision to buy Goko Café. When Breshkai Berlin took ownership of Laguna Beach’s Goko Café earlier this month, she struck a deal increasingly rare in the current economy: the successful sale of a small business.

“It was meant to be,” said the sanguine new owner of the health food and coffee spot, near the corner of Thalia Street and Coast Highway, admitting she “fell in love with the place” as soon as she saw it.

Berlin, who goes by BB, could forgo financing, which makes her one of the lucky ones to actually complete a transaction.

Sales of small businesses in Orange County have declined steadily over the past three years, a trend mirrored in Laguna Beach statistics. Just 34 small businesses changed hands in the first 10 months of this year, compared to 61 in 2008 and 95 in 2007, a 64 percent decline, according to BizBen. com, which released figures this past week and has tracked the state’s small business sales statistics for more than 10 years.

Peter Siegel, BizBen.com’s president and chief executive, attributes the decline partly to the difficulty in borrowing funds needed to complete transactions, but also to uncertainty about the economy.

Since the home equity market dried up and banks have made it harder to secure loans, lack of financing is slowing the pace of transactions, said agent Gregg Tobin, of Irvine-based Pacific Coast Business Brokers, who has sold 18 businesses in Laguna Beach in the last five years. But a slowdown in sales also contributes, he said.

“In small business, one of the major factors for a buyer is reviewing the books and records,” he said. “And a lot of these businesses are not showing the income and profits of prior years,” a red flag for buyers and lenders alike.

Tobin said that though plenty of businesses are for sale, many aren’t making any money and can’t close deals. “I’ve never seen so many deals go to escrow that fall through,” he said.

Tobin usually closes 25 deals a year, but will be lucky to finalize 10 this year. Sellers who help finance the deal have a better chance of making the sale, he said, which is how he completed two recent transactions. In one case, the seller had to carry 75 percent of the purchase, and in the other the seller helped the buyer refinance their home.

For those with cash, it remains a buyer’s market.

Berlin learned the new ground rules when first exploring the purchase of a business in Manhattan Beach with financing. Her credit scores are high, but a lender refused to finance the purchase due to slow sales receipts and a profit margin deemed unacceptable. Word of mouth about the business’s potential viability wasn’t enough, Berlin said.

Berlin paid cash for Goko, so its books didn’t have to pass a lender’s scrutiny. Even so, she did her own research, checking that permits were in order and whether there were plans for other retail development of any kind in the immediate area. And she was pleased by the café’s loyal customer base. So, though Goko’s previous owners, Connie Stojkoski and George Risteski, were candid about sluggish recent sales, she was confident about the shop’s potential.

She may be on the right track. “What small business needs is customers,” concluded a quarterly report by the National Federation of Independent Business, a trade association that surveyed its members about financing difficulties.

Berlin admits to initial anxiety about Laguna’s resort town reputation, but quickly found her notion misplaced. Customers, from surfers to high school kids and everyone in between, welcomed her warmly and don’t hesitate to introduce themselves or give feedback, which she genuinely encourages and appreciates.

Another local café, downtown’s Medici Bistro, was put up for sale two months ago by owner Ali Jalali, who has yet to find a buyer. He said sales are down 80 percent, which he attributes to the poor economy and city rules that prohibit him from providing seating. He said 60 percent of his summer customers went elsewhere due to lack of a spot to eat.

Jalali said seating is disallowed because the café lacks parking. Given the economy, he was disappointed city officials were not more flexible.

Even so, he still hopes to sell his business and is counting on the landlord to assist by offering advantageous lease terms to potential buyers.

Indeed, many deals these days are contingent upon whether or not the landlord is willing to favorably adjust the rent, said the business broker, Tobin. No one wants a business if the rent is so high that current sales can’t reasonably be expected to cover it, he said.

In fact, in the last 18 months, 19 of 89 businesses Tobin has listed closed their doors before they could close a deal.

Goko Café’s landlord Cary Glenn said, “We did everything we could to help them out. They’re really great people. We want to see them be successful.”

Berlin said a week after becoming Goko’s proprietor, the landlord came by and asked, “What can we do for you?”

“Everybody wants to see us succeed, which is nice,” said Berlin. “It’s a great feeling to have that kind of environment around you.”