YOU ARE HERE: LAT HomeCollections

BUSINESS PULSE : SMALL BUSINESS IN ORANGE COUNTY : Expansion Can Lead to Financial Problems; Just Ask John Lynch

May 19, 1989|JOHN O'DELL | Times Staff Writer

If there is one common entry on the inventory list of every small-business owner, it is an unlimited supply of problems.

Some are small and merely annoying; others loom large and threaten the existence of the business.

John Lynch, a 38-year-old jewelry designer, knows all about the perils of small business and how seemingly smart decisions can lead to disaster.

Lynch recently bought an established, but ailing, retail jewelry store in Brea after successfully operating his custom design shop for 9 years. In the course of 8 months, what Lynch considered a well-planned entry into an expanded enterprise brought him to the brink of failure.

"No matter how much you plan and how much you think you know," he said, "running your own business gets chaotic, and keeping all your ducks in a row is harder than you can ever imagine."

In a recent national survey, the Institute for Enterprise Advancement asked small-business owners to rank 75 problems ranging from cash flow to disposal of toxic waste.

Not surprisingly, nine of the top 10 troubles were rooted in money.

The cost of health insurance ranked as the leading problem, followed by the cost and availability of liability insurance and the inability to maintain sufficient cash flow.

The rest of the top 10, in descending order, are federal taxes on business income, telephone costs, electricity costs, workers compensation insurance costs, payroll taxes, federal paper work and state taxes on business income.

But a number of non-monetary troubles ranked fairly high on the list.

Inability to budget time, poor projections of future sales, not knowing where to go for help, and difficulties in finding and keeping good employees were cited by the surveyed owners as among the problems that make surviving in small business more difficult.

Nationally, only 12% of all businesses make it past their third year, according to the Small Business Administration. The casualty rate is a little less onerous in Orange County, which has a 3-year survival rate of 28%.

Lynch is one of the lucky ones who had a close brush with bankruptcy and bounced back. And he figures he is a better businessman for the experience.

For 9 years, Lynch owned a custom jewelry business in Laguna Beach. While successful, the firm folded in 1984 when the landlord announced he was closing the building for 6 months to renovate and that rents would quadruple when he reopened.

For the next 4 years, Lynch worked for others. "But I found that it wasn't very satisfying." he said. "I'm real service-oriented. I love to help my customers, and I wasn't able to do that working in a big retail setting where everything is ready-made."

So 13 months ago, Lynch bought Brea Plaza Jewelers, an 11-year-old business that had fallen on hard times.

He did what seemed to be all the right things: talked to other jewelers in the area, drew up a business plan charting his every move and, using proceeds from the sale of a home in Costa Mesa, set aside enough money to carry him through the lean times he knew he would have.

The business plan called for him to obtain a $100,000 loan from the Small Business Administration to finance the purchase of inventory--especially for his all-important first Christmas season--and to help offset his initial monthly operating losses.

The business he bought occupied a 1,460-square-foot space in a small shopping center, a huge area for a neighborhood jewelry store.

But Lynch wanted to acquire an established shop with an established customer base. He planned to fill the rows of display cases by augmenting his custom jewelry work with a line of ready-made jewelry. The profit margin wouldn't be as big on the ready-made stuff, but he figured that the additional inventory would enable him to expand his customer base and bring in a steadier flow of cash.

So Lynch opened his doors, and watched as his plans began to sour.

"The first thing I learned is that people who are looking for ready-made stuff go to the discounters or chain operations in the malls," he said. And giant Brea Mall is less than a mile from the small shopping center in which Lynch's shop is located.

Meanwhile, the cost of rent, insurance, electricity, supplies and the wages of a part-time helper were all piling up. Lynch was losing money each month, just as he'd anticipated. The losses were growing smaller as customers discovered the new store, but they were rapidly depleting Lynch's capital all the same.

So it was off to the local bank to apply for the SBA loan he had been counting on.

That's when he made what almost proved to be his last mistake. He believed everything the loan officer told him, and spent the money before it was his.

Lynch said the bank loan officer assured him that his chances of getting the loan were excellent. And to clinch the deal, he paid a consultant $1,400 to prepare his SBA loan package.

But as the time neared to buy Christmas stock at a midsummer jewelry show, there was no word on the loan.

Los Angeles Times Articles