Business/Financial Desk; SECTC
SMALL BUSINESS
Selling a Family Enterprise: Tough to Decide and to Do
By MARK A. STEIN
February 19, 2004
The New York Times

When a competitor approached him about acquiring his family's plumbing supply business in Worcester, Mass., Charles Manoog reluctantly concluded that it was time to sell. His father, Russell, was in his late 60's, and Mr. Manoog wanted to end the differences they were having over how to run the company, which was founded by his grandfather in 1927.

If that decision was painful, the next one was perplexing: how, exactly, to go about selling it? The most important question was how to set a fair price, but Mr. Manoog also needed help managing the taxes on the proceeds. ''It was very, very stressful,'' he recalled.

As it is for thousands of entrepreneurs every year who put businesses on the block. As the baby boom generation reaches retirement age, consultants and academics say, the numbers will swell.

Of the 1,143 family-owned businesses surveyed last year by the MassMutual Financial Group and the Raymond Family Business Institute in Alfred, N.Y., 39 percent said they planned to change leadership within the next five years.

There are more than four million family-owned businesses in the United States, most of them employing fewer than 10 people each.

It is not just demographics driving the trend. Many families postponed selling businesses in a stumbling economy, and now want to play catch-up in a rebounding one. ''There is a lot of pent-up demand to sell,'' said David S. Lobel, managing partner of Sentinel Capital Partners, which specializes in buying small and midsize privately owned companies.

Many of those sellers are going to face the same concerns Mr. Manoog did -- finding a buyer who not only will pay what they regard as a reasonable price but will also respect their other interests, from protecting employees' jobs to supporting a favorite local charity. Often, they want to negotiate a role for themselves, too, whether as a salaried manager or a paid consultant.

But few business owners give these matters much thought in the day-to-day hurly-burly of running their companies, experts say. ''Most people are too busy building a business to think about selling it,'' said Tom L. Ogburn Jr., a management professor and director of the Family Business Center at Wake Forest University. ''We're getting ready to see a fairly significant change in ownership, and most people are not prepared.''

The MassMutual survey found that most business owners who plan to retire within five years have not laid out what will happen to the company after they leave. Whether a business owner is retiring, planning his estate or moving on to another challenge, neglecting to plan the sale of a company usually means he will not receive full value for it, experts say. And being unprepared may push a business owner to sell before being ready, or to sell to someone who will change the business in ways the seller will regret.

''Before you go about selling a business, you have to determine if selling a business will get you what you want,'' said Ken Preston, a clinical professor of management and entrepreneurship at the Stern School of Business at New York University. ''Just because someone has offered a lot of money may not be enough by itself.''

Among the basic questions that founders or owners should ask themselves is whether they want to leave the company after the sale, or stay. If they stay, do they want to stay in charge or work under someone else? Do they want the buyer to guarantee jobs for longtime employees or for the seller's relatives who work in the company? Do they want the new owner to continue to support the charities the business has traditionally helped?

The answers to these questions not only affect the personal satisfaction with the sale, but also how much the seller might get for a business.

Mr. Lobel, for example, said that a business's value to him was linked to the amount of freedom he had to change it quickly. He said he generally aimed to resell companies within five years of buying them.

''If a guy wants to give you the key and walk away, that is very different than if he wants to stay involved,'' Mr. Lobel said. Owners who remain at their companies after selling them -- or restrict whether buyers can lay off workers or sell or close parts of the business -- usually have to sell for less, he said.

Privacy is another concern. Potential buyers are naturally going to want to review the books, check inventory, talk to customers and otherwise poke around a business they are considering buying. ''You are going to have to open up and let someone traipse through your business,'' Mr. Lobel said.

Many entrepreneurs could not care less; they are suited to welcoming all interested parties to look over their books and then auctioning off the business, he said. They usually get higher prices, he added. Sellers who find the due-diligence experience unsettling -- if they have exaggerated profits to their bank's loan officer, for example, or understated them to a former spouse's divorce lawyer -- should narrow the field of potential buyers to one, two or three so that fewer eyes need to pry, Mr. Lobel and others suggest, even if that reduces the sale price.

In any case, several advisers said, small-business owners should not sell reflexively simply because a bigger competitor is coming to the area. Many local hardware stores, for example, have been able to thrive in the shadow of a Home Depot or Lowe's warehouse outlet.

''If a small business has built up a lot of good will and served customers well, it is very hard to crush a company,'' Professor Preston said. ''Small and midsize businesses sometimes worry too much about competition. I don't think they should worry as much about big companies as service the customer better.''

Once a business owner has decided to sell and has settled on whether to hold an auction or negotiate with a selected number of potential buyers, advisers are almost unanimous in their advice: $(6$)Get an independent appraisal of the business.

$(6$)Hire an outsider -- a specialist consultant, a lawyer or a certified public accountant -- to handle the talks.

$(6$)Decide if an offer is a legitimate bid or just a fishing expedition by a rival seeking proprietary information to use against you.

$(6$)Determine why a suitor wants the company. If it is to get you, decide if you are willing to work for someone else.

$(6$)Hire lawyers and accountants to structure the deal to minimize taxes.

$(6$)Be wary of accepting stock instead of cash in payment.

Mr. Manoog first hired a broker who advertised in a newspaper, but he was not happy with the broker's work. So he shopped around for an adviser and settled on the chief financial officer of a manufacturing company in Worcester. ''Because we are a small local firm, we needed someone who knew our business, knew us and knew our place in the town,'' Mr. Manoog said. While the process took longer than expected -- 18 months, ending last month -- he is satisfied with the results.

''I was looking for a place to join, both me and my co-workers, to provide for our futures,'' he said. ''I've found it.''

Photo: Charles Manoog in the display room of his family's plumbing supply business in Worcester, Mass. Selling such a business can turn out to be extremely stressful. (Photo by Michael Dwyer for The New York Times)