The second of a two-part series

Three years ago, when Lewis Elin was ready to retire, he sold Topps Manufacturing Co., a Rochester (Ind.) maker of flame-resistant protective clothing that his father founded in 1938. Of course, Elin wanted foremost a good price for his business. But -- as someone whose company provided a livelihood for hundreds of employees for nearly 60 years -- he also sought a buyer who would agree to minimal job losses at Topps's warehouse and two factories. Another condition: Elin wanted to walk away with cash. And because he felt confident in his broker and the business assessment, he held out till he was satisfied. "Otherwise, we wouldn't have done it," he says.

Elin's situation shows how many variables -- besides price -- can affect the sale of a business. What's more, his story illustrates the importance of finding a broker or adviser who can balance all the factors and bring a deal to fruition -- when most business owners' personal wealth is on the line.

In this case, Elin turned to longtime adviser American Express Tax & Business Services Inc. in Chicago, where Larry Levine, director of corporate finance services, did the valuation.

BALANCING ACT. Trust, says Levine, is fundamental to making a small-business sale go through. That's because the broker has to manage the inherent tension between sellers and buyers. The broker may represent the seller, but he can't delude a buyer about the condition of the company or its industry. At the same time, sellers want to disclose as little information as possible. They're afraid that if word gets out that they're selling, employees will quit, customers will leave, and competitors will swoop in like vultures to steal clients. A buyer, on the other hand, wants information to gauge the current value of the business and its growth potential. He also needs detailed financial records, especially if he's trying to get funding. Then there's the risk that a competitor will use the opportunity of the sale to learn about a business without ever intending to consummate a deal. "You have to find a balance that works," says Levine.

Not everyone has someone they know and trust and who's competent to evaluate and sell a business. In that case, there's no substitute for careful research of your own. Ask other business advisers for references. Make sure the person you ultimately use is experienced at valuation and knows your industry, region, and size of business. In addition, professional or trade associations may refer you to contacts who can give you an independent assessment of what a company like yours is selling for.

Next, go to the International Business Brokers Assn. Web site (www.ibba.org/codeeth.asp) where you'll find a code of ethics that can serve as a checklist of what you can expect from a reputable broker. The code's articles range from the general -- a business broker should know market trends -- to such specifics as an admonition for brokers to keep all funds they receive in trust in a separate bank account.

"FLY-BY-NIGHTS." Glenna Barnes, who last year sold her Duncanville (Tex.) pet-grooming and -boarding business for $322,000, credits careful research and reference-checking with her successful sale: She was satisfied with both the broker and the price. But it could easily have turned out otherwise. "There are a lot of fly-by-nights," Barnes says. She recalls phoning one broker, who began reading a canned statement from his company's marketing materials that described what he could do for her. "Do you really want to put your business in the hands of someone like that?" she asks. Barnes recommends that sellers ask prospective brokers for four references. And when calling those references, she says, ask bluntly if the broker was cooperative, truthful, experienced, and if he or she had the seller's best interest in mind.

If you've bought a business in the past, you know that many of the same resources buyers use can be tapped for an independent valuation of your business, which will help you to better assess the evaluations you get from brokers or advisers and to understand how a buyer might see your business. Consider Andrea Alyse and her husband, Steve Herget, who recently bought A&A Transportation, an Amesbury (Mass.) courier and transportation service. They sought valuations for similar companies that had recently been sold from BizComps, a San Diego information broker of small-business sales data, and from their local Small Business Development Center.

Ultimately, a buyer's willingness to come to terms will boil down to his or her perception of the company's growth potential. Topps's buyer was most interested in the company's earnings, so he was willing to meet Elin's other terms. Levine assessed the company by looking at the per-share price of comparable public companies, Topps's earnings, and its net asset value. Levine wouldn't disclose the sale price for Topps. But he will say it was from 3.5 to 6.5 times earnings before interest, taxes, depreciation, and amortization, or EBITDA.

Alyse, who writes case studies for the MBA program at Babson College, and Herget, who had been a branch manager for a heating and ventilation company, decided to buy their 17-year-old business because of its potential. A&A Transportation was small and stable. But it wasn't computerized, and it never advertised. "We thought we could take it to the next level," says Alyse, who adds that she and her husband plan to keep it for at least five years -- or until they can't expand anymore themselves. After that, the couple hopes to sell the business to a bigger company that has the resources to increase sales, she says. And when it's time to sell, they'll know how to do it.

By Laura Castañeda in Philadelphia

See the Previous Item in this Series on Valuing Your Business:
Putting a Price Tag on Your Company
To: FINANCE