LEGISLATION: Caveats For Owners Selling Their Companies

Ignoring day-to-day operations is a common mistake made by owners intent on selling their businesses. What's more, an owner may undermine his or her opportunities by pricing the company too high. Sometimes, merely spreading the word that a business is for sale, even discreetly, can chill a buyer's enthusiasm or deflate an offering price. And nothing chases away prospective buyers like sloppy financial records.

Consider, for example, Jack Davis (a pseudonym) and his partner Dan Willetts (also a pseudonym), who worked diligently at selling their profitable waste hauling firm. In fact, they spent so much time looking for a buyer - almost half of their working hours - that they paid little attention to serving existing customers and getting new business. The falling sales made it more difficult to attract buyers. "We neglected to actually run the business," said Davis, who eventually sold the company for less than anticipated.

"Business owners who spend years building their business are often ill-prepared for the very different process of selling it," a business broker told The Wall Street Journal. Indeed, qualities that helped an owner build a business - self confidence, for example - can sabotage the chances to sell it.

For example, the sale of a profitable East Coast hauling firm nearly fizzled because the owner's ego got bruised; he felt the prospective buyer was ignoring him. The seller expected the buyer to insist that he be virtually on-call from his retirement home in Arizona. He looked in vain for signs that the buyer knew how important he was. Finally, the buyer sensed that the owner was miffed. The sale went through only after the buyer personally assured the seller that the new owners would need the seller's advice after the deal was closed.

Entrepreneurs take pride in what they create, and want to depart on their own terms. Davis and Willetts wanted an all-cash transaction, which was acceptable to the buyer if they could agree on a price. Sharp differences between each side's assessment of the company's worth prolonged and intensified the negotiations. Ultimately, the sellers stopped agonizing over every detail in the transaction, cut their asking price and accepted a secured installment note from their buyer.

Owners of hauling firms must be realistic about economic conditions affecting business turnovers in solid waste disposal. When market conditions strongly favor sellers, some owners like to wait, hoping that prices will continue to climb. If a recession hits, however, prices tumble.

Sellers cannot appear too eager to unload their company nor too willing to accept a low price. For example, two brothers who sold their Midwestern hauling company in 1993 still wonder if they received what it was worth. "If I regret anything," said one of them, "it is that we didn't try to create more competition between prospective buyers."

Appraisals of family-owned or closely held businesses are difficult, involving a broker, an accountant or even an investment banker. As with real estate, comparable sales are often the deciding factor.

Experts warn sellers not to rely on what they read in the newspaper. "People who haven't sold a company before grab the New York Stock Exchange listings and see companies selling at 20 to 40 times earnings," said a Los Angeles business broker. "They don't understand those are multiples paid for large companies with depth of management and products and a ready public market."

By contrast, small companies generally sell for prices ranging from five to seven times earnings before interest and taxes, according to a spokesperson for an investment banking firm.

While getting the word out can create a larger pool of potential buyers, employee morale may suffer and customers may be lost. Even after landing a solid prospect, sellers must be careful - especially when disclosing financial information and customer lists.

In addition, if buyers are likely to want several years' audited financial statements, then appropriate accounting controls and practices must be solidly in place.

The inevitably tense and emotional negotiating process can be shortened if a seller knows what concessions he or she can make. The sale of a mixed waste processing facility got into trouble when the buyer questioned an environmental report showing no pollution problems at the site. For months, the parties argued over whether another study was necessary. The buyer ended up accepting the report. For its part, the seller concluded that it should have stood firm from the start, adopting a take-it-or-leave-it attitude toward the study.