It may come as no surprise that small-business investment trends have generally followed the downward trend in our economy of late.

The number of small-business investment opportunities and investors has dropped off dramatically in 2008. The number of businesses sold in the state of California declined by approximately 16 percent year over year through October, according to sales statistics compiled at BizBen.com.

Locally, the counties of San Bernardino and Riverside have seen a decrease in the number of businesses sold for the same period of 10.5 percent and 48.8 percent, respectively. In San Bernardino County, the number of businesses sold in the previous 12 months through October dropped from 1,152 in 2007 to 1,116 in 2008. In Riverside County, it dropped from 999 to 590.

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Factors influencing this trend include economic and political uncertainties, inflationary pressures driving costs up, lack of equity for small-business investors, the recent credit crisis affecting the availability of small-business loans, and reduced business earnings, which have driven many small-business owners to postpone the sale of their businesses. The National Federation of Independent Business (NFIB) monthly report, Small Business Economic Trends -- October 2008, stated that a majority of business owners, approximately two-thirds, reported earnings for the last three months were lower compared with the prior three months.

The primary problem identified by small-business owners was "poor sales," which equaled or surpassed taxes as the No. 1 problem facing small businesses for only the third time in the last 20 years of the NFIB report. Business valuations for small businesses are tied directly to the sales and earnings of a business.

The reduction in the number of small businesses for sale has been paralleled by a reduction in the number of small-business investors actively seeking to acquire a new business. The lack of buyers is particularly acute on the lower end of the small-business investment spectrum involving "main street" businesses. "Main street" businesses are generally defined as consisting of retail, restaurant, entertainment, personal/professional services and other small businesses with annual sales of less than $1 million per year.

This "main street" segment of the economy is important because it makes up approximately 79 percent of businesses in the U.S., according to the 2002 U.S. Census Bureau. The reduction in "main street" business buyers is largely attributed to a lack of equity associated with the depressed real estate market and a tightening of SBA small-business acquisition loan underwriting. SBA business-acquisition loans are the primary means of acquisition financing used by many "main street" business buyers. The reduction in SBA financing has forced many small-business owners to consider seller financing as the only alternative available to help them sell their businesses.

On a more positive note, the demand for the upper end of small businesses, those with earnings before interest, taxes, depreciation and amortization (EBITDA) in excess of $1 million per year, appears to be robust and stable. Many regional business brokerage firms report strong interest and activity for middle-market businesses with EBITDA in excess of $1 million. Additionally, the outlook of small-business owners appears to be improving. The National Federation of Independent Business Research Foundation reported that the Index of Small Business Optimism rose 1.8 points to 92.9, moving up for the second consecutive month. An Optimism Index of 92.9 is still considered to be indicative of a recession, but at least the trend is upward.

Ed Fixen is a certified business broker and the president of BusinessQuest, a business brokerage firm serving the Inland Empire.