Business Opportunities Abound, Even in Bad Times (NYT)

Business Opportunities Abound, Even in Bad Times

By BRENT BOWERS

JOB losses, falling property values, more people without health insurance. With the current state of the economy so bleak, those are the issues getting a lot of attention. But they are not the whole picture.

Some entrepreneurs are actually doing well in part because times are hard. This is a story about four of them.

One, Craig Brandman, founder of Medilinq, a provider of medical discounts for low-income people, predicted in a recent interview that his company would increase the number of its participants by more than sixfold this year, to 200,000 from 30,000 at the end of 2008.

Another is Peter George, the 49-year-old chief executive and part owner of Fidelis Security Systems in Boston, whose company provides protection against data breaches. Mr. George said sales rose 55 percent last year.

And Charles L. Burckmyer and Scott Noll, co-founders of Knob Hill Partners in Boston, are in the enviable position of sitting on about $500,000 in cash and looking for a company to buy at a favorable price in a weak market.

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Dr. Brandman, a 60-year-old cardiologist who founded Medilinq in Houston in March 2004, described the company’s target customers as the working poor and the self-employed who are both uninsured and ineligible for Medicaid. They pay $24.95 a month for steep discounts on medical bills that the company has negotiated and that, he said, “are competitive with those offered by the Aetnas and the Cignas of the world.” Health care providers support his product, he said, because the company makes sure most bills are paid within 10 days, in contrast to the industry average of 75 days, and because it eliminates the paperwork that can eat up 25 percent of their revenue. “Medilinq is a sort of a Costco and PayPal mode for health care,” Dr. Brandman said.

As the number of people without access to health care grows and as billing headaches become more acute, he added: “We’re looking at having a big year this year. Economic hard times are a good opportunity for us.”

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Mr. George, of Fidelis Security Systems, said that in the past, companies’ loss of digital assets like design documents and marketing plans was generally inadvertent, as the data slipped through holes in the computer system.

But in a recession, he said, there is an increased chance that disgruntled or laid-off employees might purposely disseminate intellectual property to potential rivals.

“The big threat to computer systems until now has been hackers from the outside,” he said. “Data leakage by insiders is the next big threat, and we can stop it in its tracks.”

Fidelis’s orders jumped 99 percent last year, he said. In 2009, “our operating projection is to grow faster.” Fidelis also hopes to add to its work force in the second half of this year. It doubled last year to 50.

Skeptics might suppose that the recession would temper Mr. George’s ambitions. But he says he joined the company last March just as it was completing $22 million in venture capital financing. The timing, he said, was fortuitous — or “plain dumb luck.” That nest egg should tide the company over for the next couple of years, eliminating the need to go out again with cup in hand when options for financing are limited, he said.

A partnership with International Business Machines, which markets his products, helps as well, he said. But however slow the nation’s economic recovery might be, he said, he predicts substantial growth for Fidelis.

There were 19 major data breaches in the United States in January alone, costing companies hundreds of millions of dollars, he said, and the market to protect against such breaches is expected to grow to $1.2 billion in 2011, from $500 million this year.

“My ambition is to build this into a $50 million to $100 million company within three years,” he said.

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Mr. Burckmyer and Mr. Noll, both 32 years old and with entrepreneurial and sales backgrounds, set up Knob Hill Partners last summer and persuaded a dozen investors to provide them with a total of $500,000 in operating capital to look for promising businesses whose owners were interested in selling. They are searching especially for companies with strong growth potential and price tags of $10 million to $30 million in energy efficiency, specialty software or information technology. Once they locate a company, they said, their investors are prepared to contribute the funds for them to acquire it and manage it.

With prices falling, the recession is a good time to be shopping for a business. But Mr. Burckmyer and Mr. Noll say they have a competitive advantage over others who are prowling the market with the intention of re-engineering a company and flipping it after two or three years.

Typically, owners who have nurtured their ventures for decades “want to protect continuity,” Mr. Burckmyer said. “Their workers are like family to them.” Unlike the bargain hunters, he said, he and Mr. Noll promise to stay in their new management roles for the long haul and to avoid layoffs if possible.

He cited inconclusive talks the two men held with the owner of an electronics equipment recycling company. “He wanted somebody who was committed to sticking around,” he said. “Once people understand what we’re doing, we get a better reception.”

Knob Hill Partners is known as a “search fund.” Such funds have been around for a quarter-century, but because they have consistently produced double-digit returns, they are gaining popularity with wealthy people in this recession as an alternative to stocks, bonds, real estate and other traditional investments.

Mr. Burckmyer and Mr. Noll closed their fund in December when they got enough funds to conduct their search. Once they find a company they want — and what their investors, who are savvy business people and their de facto consultants, also want — they will be able to go back to their investors and get the resources to quickly seal a deal.

Nobody enjoys witnessing the pain that the recession is inflicting on ordinary people, Mr. Burckmyer said. Still, the troubled economy offers openings for entrepreneurs with sharp eyes and sharp elbows.

“We’re now in what I humbly concede to be an enviable position of going out to find a business to buy as pricing multiples fall through the floor,” he said.

Stimulus Law Aids Small Business, but Benefits Are Not Easy to Find (NYT)

Stimulus Law Aids Small Business, but Benefits Are Not Easy to Find

By MICKEY MEECE

THE $787 billion recovery package that President Obama signed into law on Tuesday has a little something for most small-business owners, though some complained that the law’s benefits were not easy to figure out.

“Who has time to read it?” said Michael J. Fredrich, president of MCM Composites, a maker of highly engineered composite molding parts in Manitowoc, Wis.

Ethan Siegel, chief executive of Orb Audio, a maker of home theater speakers and systems, said his initial impression was that “there is nothing in here for me as a small-business owner.”

But Mr. Siegel said that as he started to dig deeper, he found a provision that would increase loan guarantees for Small Business Administration lenders. That, he said, would make it easier for Orb, whose main office is in New York, to secure a line of credit. “With a line of credit we can do a lot more with the same amount of capital,” he said, “which is exactly the purpose of the stimulus package.”

Several other items also caught his eye, including one that offers a tax credit for businesses that hire disadvantaged workers like veterans and “disconnected youth,” those who are not in school or working. That credit could be a tipping point between hiring and not, he said. “This is especially true since we build the speakers in the U.S.A., and the people with production skills can fall into these groups.”

Business owners and their tax advisers are finding that a little detective work is needed to reap the full benefits of the law, which includes tax relief for businesses and individuals, as well as spending provisions.

Todd Flemming, chief executive of the Advantor Systems Corporation, a military contractor, for example, said he found spending allocated to military construction. His company, based in Orlando, Fla., makes and installs high-security systems at military installations worldwide. “That’s spending that would be stimulative for us,” he said.

Not everyone will be served directly, said Leonard Steinberg, who owns Steinberg Enterprises, a tax, financial and business advisory company in West Windsor, N.J. His clients, including mom and pop retailers, limited liability companies and S corporations — corporations that elect to have their income pass through to the shareholders — “won’t see the benefits of the stimulus,” he said.

Even so, tax specialists say, those companies may be aided indirectly by the tax relief for individuals, which will give workers more money to spend and will help certain taxpayers avoid the alternative minimum tax.

At the same time, some of the tax provisions for businesses, while they mean well, may not help in the way intended, said Barbara Weltman, a tax specialist and author of “J. K. Lasser’s Small Business Taxes 2009.”

She cited one provision that allows businesses to deduct up to $250,000 for capital investments. “That sounds great,” Ms. Weltman said, “but you can’t benefit from it unless you are profitable.” She added that many businesses were having trouble securing financing, but, if that should free up, the incentive was there.

Another provision gives companies a 50 percent bonus deduction on capital investments made in 2009 that normally would be deducted over many years. “Again, that only benefits those who are making capital investments,” Ms. Weltman said. “So many people are struggling to pay bills that they cannot go out and make purchases.”

One tax measure she likes is the ability of companies to use losses from 2008 to offset profits in earlier years — any full year that is more than two but less than six years ago — and obtain an immediate refund. It is only for 2008, she pointed out, and for companies with annual revenue of up to $15 million.

Mr. Fredrich said he had looked for a silver lining in the law but had yet to find one. “We certainly will have a loss to carry back, but we could do that before the bill passed,” he said. “It does not even move the needle. If you have no revenue, nothing else matters.”

He said he had hoped in vain for a reduction in the highest personal tax rate, a change that would have allowed him to put the money back into his business.

Now that the bill has been signed, he said he had not had time to read all 1,000 pages, but he was not optimistic about finding help for his company, which had its last production day of the week on Wednesday.

Weekly orders at MCM used to generate $100,000 to $180,000, Mr. Fredrich said. Last week, the company took in $32,000, and this week $19,000. “We expect it to be worse,” he said. “You just have to gut it out.”

This article has been revised to reflect the following correction:

Correction: February 21, 2009
The Practically Speaking column on Friday, about benefits for small businesses in the federal stimulus package, described incorrectly a provision that gives companies a 50 percent bonus deduction on capital investments. That provision was extended to investments made in 2009; it is not just for investments made in 2008. The article also misstated the production schedule of MCM Composites, whose president commented on the legislation. Wednesday was its last production day of the week, not the month.