Ask Norm

I've been getting a lot of great letters lately, and many of them have to do with selling a business and moving on. I guess that's what happens when you write an 11-part series on the subject. In any case, I thought I'd share some of the queries -- and my responses -- with you this month. Unfortunately, I don't have time to answer all the e-mails I receive, but rest assured that I love hearing from you and read each and every message you send me.

Dear Norm, My family is trying to sell a business we've invested more than 30 years in. We have questions about how much information we should reveal in the initial courting phase, as opposed to the due diligence phase. We're tired of responding to potential buyers who turn out to be window shoppers. Should we be sharing P&Ls, tax returns, and other financial information from the beginning? Exactly what constitutes due diligence anyway? And how do we protect our information (and our time) from browsers who aren't serious buyers? --Darla

Dear Darla: To begin with, ask would-be acquirers to sign a nondisclosure agreement, which bars them from disclosing to anyone else the information you let them see. It will not only protect you legally but also screen out a lot of window shoppers. In addition, you should do your own research on the buyers. Ask them for references. Find out whether they've bought other companies, and, if so, how they conducted themselves before and after the acquisition. Once you have a serious buyer who meets your criteria, the process of negotiating the terms begins. First comes a letter of intent that you both sign. Then comes due diligence, when you open your books and allow the buyer to check out the financial health and internal workings of your business. By then, the window shoppers should be long gone. -- Norm

Dear Norm, I started my telecommunications business when I was 18, and I'm going to be 47 this summer. It's a successful business and provides me with a good living. I love the technology. I love my employees. I love my customers (most of them). Yet each day I feel more and more unfulfilled in what I'm doing. At the risk of sounding arrogant, I feel like a big fish in a little pond, unchallenged and bored. I have a lot of business knowledge that I feel is being wasted here, just doing the same thing year after year. I've tried some side ventures over the years without much success. I've also considered selling the business, but it's too large to be bought by a local competitor -- we do about $2.5 million a year -- and too small to attract the attention of large companies. Besides, I don't know what I'd do if I did sell it. And will whatever I do next allow me to earn as much money as I'm earning now? More important, will I like it, or will I regret letting go of the one thing I've had all my adult life? You seem to have ended up with the perfect situation without ever intending to get there. Do you have any words of advice to someone in my situation? -- Todd

Dear Todd: For openers, I don't agree that your business isn't sellable. You can always sell a good business with steady cash flow. It's also a mistake to assume that the only potential buyers are companies in your industry. People buy businesses for many reasons, including some you'd never think of. That said, boredom doesn't strike me as a good reason to sell an established business that gives you a good living. Instead, I'd urge you to focus on finding a way to recharge your batteries. You might start a new business on the side. You might try mentoring young entrepreneurs or getting a teaching job somewhere. Or maybe you've simply set your sights too low in your current business and need to challenge yourself with more ambitious goals. The world is filled with opportunities, and you don't have to sell your company to find them. I think you'd live to regret it if you did. -- Norm

Dear Norm, I am a manufacturers' representative in the luxury plumbing market. I incorporated six years ago because I had two experienced people working for me whom I wanted to keep. I was selling around $5 million of product per year at the time. Today we sell around $20 million. We now have seven employees, including myself, and generate around $50,000 a month in commissions. We spend all we make on salaries and expenses and never have anything left over. I am 58 and own 67 percent of the company. My partners are 56 and 62 and own 27 percent and 5 percent, respectively. I would like to cash out some of my equity and gain a partner who will help fund us and grow the company, so that I can retire with limited responsibilities in five to seven years. Are you aware of any private equity firms that would be interested in doing a deal with an established manufacturers' rep firm that has an excellent reputation, with the goal of grooming younger managers to eventually take over? -- Lee

Dear Lee: I hate to be the bearer of bad news, but no private equity firm will be interested in buying your business. Investors of that sort look for what they call free cash flow -- that is, the cash flow you have after paying salaries and other expenses -- and you don't have any. That doesn't mean you can't sell your business, however. You've come up with a successful way to earn a living while being your own boss. A lot of other people would like to be in your shoes. There may also be other manufacturers' reps willing to pay for the opportunity to get into your line of business. If you know a good business broker -- by which I mean one who specializes in your type of business -- you might start there (more on business brokers below). Otherwise, I'd begin networking and see what you turn up. -- Norm

Dear Norm, How do you know when the time is right to sell your business? I have an online retailing business that's doing well. We grew 60 percent last year, and we've never been in debt. I'm thinking about an exit strategy, and I'm just not sure when to sell, especially since we are having tremendous growth right now. I don't know how long the growth will hold up, but we've experienced it in each of the five years we've been in business, and we are on track to grow another 55 percent to 60 percent again this year. So is it better to sell your business after the growth slows down or at the peak? -- Scott

Dear Scott: Sophisticated buyers will take your growth rate into account when calculating the price they're willing to pay for your business. Your decision about when to sell should be based on other considerations. Having just gone through the process myself, I'd suggest you ask yourself three questions: 1. What kind of life do you want to have five or 10 years from now? 2. What are you looking for in a sale in terms of the money you would get, the way your employees and customers would be treated, and the future of your business? 3. What do you want to do next? Once you answer those questions, the path you should take will become much clearer to you. -- Norm

Dear Norm, Fifteen years ago, we began our business as a father-son venture to add document-management and courier services to the small but growing market we live in. Dad wanted to get out of commercial real estate, and I was fresh out of school and gung ho to create something. Fifteen years later, we are both tired. Our business and our market have grown, but local competitors have sprung up, and large industry players have encroached on our area. All this competition has greatly depressed prices in our market. While our operating costs have increased tenfold over the past 15 years, the prices we can charge for our storage and services have actually declined. We've also filled all three of our existing buildings, and the prospect of having to find other locations is daunting. Recently, we've been contacted by one of the larger players in our industry about the possibility of being acquired. We have no idea how to qualify an offer or determine our company's actual value. My father's real estate broker background tells us we should hire a qualified agent if we're going to take a serious look at this proposition. What do you think? -- Jimbo

Dear Jimbo: Everything you say about the business you're in is correct, but you should also be aware that your company has real value. There are many buyers in the market right now -- including me and my partners at Allied Capital. Although I didn't use a broker when I sold my business, I'm not sure that was very smart. I think you and your father would be wise to hire a broker. I say that even though I usually advise people to avoid business brokers. Many of them are hacks claiming to be expert in every type of business and every kind of deal. The exceptions are brokers who have spent years in a particular industry and have become true experts in it. Our industry is lucky to have two or three of them who are top-notch. I don't want to name names here, but you shouldn't have much trouble tracking down the good ones. And by the way, if you do decide to move forward, I hope you'll include me on your dance card. I'd be happy to meet with you at any time. -- Norm

Norm Brodsky is a veteran entrepreneur whose six businesses have included a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.