From the January 1998 issue of Entrepreneur

It wasn't until her two daughters were grown and out on their own that Diana Lautens started to notice how dependent her third offspring was. It was demanding most of her time and attention. Even though she had birthed, nurtured and groomed this one, much as she had the older two, she was starting to feel tied down and a bit resentful.

Finally, she put the kid up for "adoption," as she now calls it. Early in 1996, Lautens decided to sell Sunday Afternoon Gallery, her 15-year-old high-end art prints and custom framing business in Winnetka, Illinois. She had already shuttered the profitable branch location in nearby Lake Forest the previous fall because the effort it took to keep both locations running had become too much for her. Then, as the new year dawned and she could see her work schedule cramping her plans to help her daughter plan a June wedding, she realized, "I didn't want to lie on my deathbed some day thinking, `I wish I'd done the wedding instead of the framing,' " she recalls.

By March, Lautens' business broker had found a committed buyer (one of Lautens' former employees); by May, the deal was complete, and Lautens took the month of June off to handle wedding details. Returning to work at Sunday Afternoon as a three-day-a-week employee--under the terms of the sale--was "divine," she says now. "I take orders from somebody who worked for me for many years, and nobody ever asks me to work Saturdays."

Lautens had piloted her thriving business for more than a decade, and when she tired of it, she smoothly parachuted to an easier life. That can happen for sellers who follow a few common-sense rules that also make sense for businesses that aren't for sale. Enjoy the ride, experts say, but know it will inevitably end. Keep the business in sound shape, keep quiet about your plans for a sale, and keep a realistic eye on what a sale looks like. These and a few other practices can make your exit as smooth as Lautens' was.


Dennis Rodkin is a writer in Chicago.

When The Ride Is Over

Lautens was lucky; she noticed right away that she was no longer enjoying her once-beloved business. "When it stops being fun, that's the number-one sign it's time to sell the business," says Barry Merkin, clinical professor of entrepreneurship at Northwestern University's Kellogg Graduate School of Management in Evanston, Illinois.

Speaking not only as an academic but from the experience of building and selling his own metal furniture manufacturing business, Merkin says, "If the business isn't making you delighted to get up in the morning anymore, then you're probably not doing the good job you used to do, so it's a marvelous time to sell."

But it's also a dangerous time, Merkin says. "When [an entrepreneur decides] to sell, some kind of emotional `click' happens--and it gets out of control fast. Instead of spending your days and nights trying to build your business and keep it healthy, you are focused on selling it and getting out. But if you start neglecting the business to try to sell it, your need to sell it increases and the interest in [keeping it up] is gone." This vicious circle is self-defeating; it's important to maintain a healthy business even if you know you are letting it go.

The realization that it's time to sell can dawn any day, so the smart business owner is always prepared. In fact, experts advise having your eye on the exit from the day you open for business; it's a tactic they say keeps the business in its best shape to be sold and handed over.

"If you know you want to retire when you turn 65, you can plan on that as a sale date, but most people can't fix their horizons that precisely," says Frederick D. Lipman, a Philadelphia mergers and acquisitions attorney and author of How Much is Your Business Worth? (Prima). "That's why they should always be preparing for the day they will leave the business."

A sound business is easier to sell--and to keep. If you're in a retail business where value is based on how many locations you have, boosting the number of locations sweetens the pot both for potential buyers in the future and for you in the present. Similarly, if your company has developed a product or process but you haven't gotten a patent, you're exposing yourself to risk and potentially driving down your company's eventual sale price.

Money Matters

Even a well-kept business may need tidying up before it's put on the market. "Two key things to clean up are the balance sheet and the profit-and-loss statement," says Jack R. Sanders, a business broker who gathers sales data on small businesses and publishes it in his annual Bizcomps studies. "[Move off the balance sheet] all nonoperating assets, anything that won't go with the business, like a boat or a plane," Sanders says. "Next, if you haven't been reporting some of your income--and everybody knows some businesses don't--that's a fatal error. If you're making the money, you should put it on the books and pay for it." One big reason: Most sale prices are figured, at least in part, on the business's income. Underreporting it will undervalue the business.

Valuing the business may be the hardest part of preparing to sell. As with residential real estate, no two businesses can be priced exactly alike because of the unique nature of each offering. Sanders' Bizcomps is the closest thing there is to a real estate agent's list of comparable recent sales. Tabulating data on some 2,500 sales of businesses each year, Bizcomps offers some insights into what businesses of your type have recently sold for. For example, if a business in your field is listed as having sales of $1 million and as selling for $400,000, you can calculate that your own business might go for about 40 percent of your annual sales. Of course, comps are only approximations; the actual sale price is the result of negotiations.

"Almost all small businesses go for between one-and-a-half and three-and-a-half times earnings," Sanders says.

Because market conditions and the needs and finances of both buyer and seller vary from deal to deal, Lipman advises always selling by auction in order to nail down the right price. With the auction approach, multiple bidders in an open market establish the ultimate sale price by bidding against one another. Lipman says sellers should rely on the auction method so completely that they don't even establish a minimum opening bid: "That tips your hand as to where you expect to go."

Go For Broker

Should you sell the business yourself? The consensus among experts and entrepreneurs is, Don't waste your time trying. "If the business is something with general value and a high market, maybe you can sell it on your own," says Alex Oziran, a Chicago-area entrepreneur who previously built and sold a medical-transportation firm and now owns three Pearle Vision franchises. "It's more likely that a small business is attractive to only a small group of buyers. Get somebody who knows how to network to those buyers."

Or, as Lautens says, "I know how to sell a serigraph or a frame, but I know nothing about how to sell a framing business."

Both entrepreneurs agree a business broker can be an invaluable aide in selling your business. Like a real estate agent, a business broker knows not only where the buyers are but also what they want to buy and how to make your company stand out from the others. "Even a business that isn't large involves a deal that is complex enough that you ought to have a business broker to guide you through it," says Merkin. "What if [you're a novice] at selling and you wind up dealing with a buyer who's bought four businesses in the past six years? There will be an imbalance of skill that works against you in the negotiations."

Whenever possible, Lipman and Sanders say, it's best to hook up with a broker who has experience selling businesses in your field. If you can't find such a specialist, Sanders urges using a broker who is a member of the International Business Brokers Association and, even better, one with the Certified Business Intermediary designation. Both are marks designating brokers who have sufficient training to sell businesses in various fields.

Leonard B. Sis, owner of Sis Investments Inc., a business brokerage firm in Oak Brook, Illinois, explains that a broker also plays the crucial role of gatekeeper. "Try to sell it yourself, and you'll be overwhelmed by phone calls from people who want to meet with you but who don't have any money or people who have no understanding of what you're trying to sell--unqualified buyers that a broker can screen out quickly and effectively."

Keeping It Quiet

Screening potential buyers is especially important when you don't want your employees to know the shop is for sale. A broker can guarantee that only serious buyers will visit your site and can ensure they'll sign confidentiality agreements before those visits.

Is the cloak-and-dagger routine necessary? Absolutely, the experts concur. "No one else in the company needs to know you're looking for a buyer," Lipman says. "There is no advantage to telling the employees beforehand." Tell them, he says, and you risk seeing them jump ship, possibly taking important customers or suppliers with them. Even if they stay, they'll be understandably antsy about the future and distracted from their work.

"If I'd told my staff members, their anxiety would not have been good for the business and I'd have less to sell," Lautens says. "So I waited until I could tell them I'd sold it to a great guy."

Oziran once sold a business to one of his employees and knew he was taking a risk. "If I had found out he didn't want to buy or couldn't, I couldn't have stopped him from letting word get around that I was selling," Oziran says. He suggests sellers who want to take this risky route protect themselves by investigating the employee's finances and interest in entrepreneurship as thoroughly as possible before broaching the subject.

Merkin says this closed-mouth policy should extend to suppliers and others outside the company, as well. "If they've been depending on you and you tell them you want to sell, they'll be less likely to rely on you, and there goes your business's value."

Finally, Sanders cautions business owners against indulging in the fantasy that they can sell the business for a heap of cash and retire to a beach somewhere. He finds that about three-quarters of the transactions listed in Bizcomps involve some form of seller financing. "People need to get rid of the idea that somebody's going to walk in and cash them out," he says. One important effect of seller financing is that it encourages the seller to stick around and provide training and other consultation services while the new owners get going, which helps keep the business successful.

But, as Lautens found, hanging around can spark a new round of fun. "I'm doing the framing I love," she says happily, "and I have none of the worries of business ownership."

Price Points

"No one knows what a particular business will sell for," says Frederick D. Lipman, a Philadelphia mergers and acquisitions attorney and author of How Much Is Your Business Worth? (Prima). Lipman outlines many pricing methods in his book, the top six of which are described below.

1. Rule of thumb. Some industries have accepted yardsticks for measuring each business's worth. It might be the number of subscribers or a formula multiplying gross sales by an accepted figure.

2. EBITDA. The business's Earnings Before Interest, Taxes, Depreciation and Amortization is multiplied by a figure that is the result of a "backward" calculation on sales of other companies in the same industry. Lipman cautions, though, against carrying over the multipliers from large companies for calculations on small ones.

3. Discounted cash flow. Here's where your business's future, as well as its track record, count most. Revenue projections and operating profits are discounted in line with the level of risk that faces your business. Various formulas exist for determining the discount rate.

4. Comparable company valuation and

5. Comparable transaction valuation. Both methods attempt to translate figures from similar sales to match the financials and other relevant data on your business.

6. Asset accumulation. Your business's value is assumed to be the sum of the ongoing value of each component of the business. Real estate and trained employees, among other things, get separate evaluations. This method is valuable if individual assets are eliminated from the sale; recalculating the price to reflect those subtractions is a straightforward process.

Contact Sources

Bizcomps, P.O. Box 711777, San Diego, CA 92171, (619) 457-0366

Frederick D. Lipman, c/o Blank Rome Comisky & McCauley, 4 Penn Ctr. Plaza, Philadelphia, PA 19103, (215) 569-5518

Pearle Vision Inc., 322 Skokie Blvd., Northbrook, IL 60062, (847) 714-9500

Sis Investments Inc., 2311 W. 22nd St., #102, Oak Brook, IL 60521, (630) 571-1505

Sunday Afternoon Gallery, 548 Chestnut St., Winnetka, IL 60093, (847) 446-3970