Note: The following is based on actual case histories. The names have been changed to protect the guilty.

Antonio Tubal graduated from college as an electrical engineer and went to work for a large manufacturer of commercial refrigeration systems. Tubal spent several years working in the company’s division that designed and manufactured air conditioning systems for large industrial/commercial facilities. Tubal was very good at what he did and began moving up the corporate ladder. Part of Tubal’s job was going out into the field and supervising the installation of the A/C systems while the buildings were under construction. He noticed that the construction contractors always had a hard time installing the control system to regulate the coolant flow at the juncture where the coolant piping and electrical wiring came together. So, he designed and built in his garage a special junction box that could be used to facilitate the installation, and he gave it to a construction contractor for free. The contractor loved it and asked Tubal if he could get a dozen more.

Three years later, Tubal had left his job, patented his product, was building “junction boxes” full-time, and had over $500,000 in sales. Tubal had a unique product that commanded gross margins over 50% and no competitors. Major building products manufacturers thought the market too small to attempt to crack. Eight years after building his first junction box, Tubal’s company was doing $4 million in sales with a bottom line of over $1 million.

When I met Tubal, he was 63 years old and had accumulated substantial wealth from the business. He had a son who might be capable of taking over the business, but the son had a successful career elsewhere. He thought about selling the business, but he boasted that the “business practically ran itself”. Tubal’s wife was retired, and they liked to take month-long trips overseas. I tried to convince Tubal that it was time to sell, but his rejoinder was “Why sell off the golden goose?”

I next saw Tubal 2 years later. He didn’t quite come out and say “I’m ready to sell” (remembering his boast from 2 years earlier), but after talking for an hour or so about the business, he admitted that “maybe” it was time to sell. About 6 months before this meeting, Tubal had lost his largest customer because that customer decided to use a new cooling technology. In fact, sales were down by one-third, but the company was still profitable. Three months later when we engaged a transaction intermediary, sales were still on a downward spiral. It wasn’t just that Tubal had lost a big customer, but he hadn’t been working hard to find new customers. Tubal had been letting the business “run itself” into the ground. At the end of the day, the business was sold for $850,000, a fraction of what it had been worth 2 years earlier.

Jessica Lorenzo had founded a medical device manufacturing firm when she was 35. After 10 years of hard work, the business was on a solid footing and was consistently earning profits over $200,000. Ten years later, the business was doing $9 million in sales, earning $500K–$1 million per year and had 40 employees. Jessica had worked hard for 20 years, built a successful company, and was ready to step back and enjoy her young grandchildren. Jessica and I worked on a plan to sell the business to 2 key employees, but after much consideration, the employees decided that they didn’t want to take on the risks involved in owning a business.

The obvious next step was to sell the business to an outsider. Jessica hesitated before engaging a transaction intermediary. She wanted to talk with 3 larger competitors to see if they would be interested in buying her company. She thought she might save the broker’s fee and/or be able to manage the transaction better if the buyer was someone she knew and respected. One of the companies that Jessica spoke with was interested, but they drove a hard bargain. Their final offer was at least one-third less than the business was worth. Jessica learned too late that a seller only has leverage if there are multiple buyers competing to purchase the business. A good transaction intermediary can create a “controlled auction” and bring several buyers to the table at the same time. Soon word was out on the street that Jessica’s company was for sale, and since she was only 55, she must be selling because the company was in trouble.

Lance Shelak is a professional engineer and in 1985 started his own firm. He specialized in land development and his clients included developers and a number of municipalities in the Philadelphia suburbs for whom he acted as a consulting engineer. Lance had an excellent reputation and developers, architects and municipal officials loved to work with him. By 2006, Lance was 64 years old and was thinking of retiring. The business was doing $2.5 million in sales, had 17 employees, and Lance was netting about $450,000 per year. His youngest child (of five) would finish college the following year. I did a valuation of Lance’s business and determined it was worth about $1.8 million.

Lance procrastinated. In 2007, the recession began. By the end of 2008, the financial collapse had occurred, and the construction industry was in a shambles. There were no buyers for any business remotely connected to construction. By 2009, sales were off by 50%. Unlike many of his competitors, Lance was able to keep his business going and marginally profitable. By 2012, sales were up to $1.5 million, but there were still no buyers in his industry. In 2014, sales were $2 million and profits hit $350,000. Lance was now 72 and the previous 5 years had been the toughest of his life. Early in 2015, he closed a deal to sell his company to a much larger engineering firm for $1.4 million.

Timing and process are everything when selling a business. The best time to sell a business is when sales and earnings are on an upward trajectory and external factors are favorable such as the availability of financing and strong M&A activity in the industry. The process by which a business is sold—especially using a controlled auction—can give the seller a good opportunity at getting top dollar on favorable terms. A business owner always makes a mistake when he or she tries to sell the business by themselves. A sale of a business is a once in a lifetime event for most business owners—consult with someone who can show you how to do it right.

Published in Business2Business magazine, June 2015