Investors Turning Attention to Traditional Businesses.

ANXIETY created by a jittery stock market is prompting many business owners to think hard about why they are in business and consider whether or not they should sell out. The good news is that owners of traditional, non-Internet businesses are finding their companies attractive to buyers, since so many investors lost everything on dumb dot-com deals.

"We certainly see a lot of people coming to us with Internet businesses to sell," said John Mack, CEO and co-founder of USBX (U.S. Business Exchange), based in Santa Monica. "But the deals are not getting done because these companies have no revenue and no tangible assets."

In contrast, traditional businesses selling metal components, electronic parts, plastics and printing -- and information-technology services -- are in demand and changing hands.

"Small to medium-sized transactions are typically not affected in a downturn," said Mack. "The debt financing that's difficult to come up with is not typically used in small transactions."

He said that most businesses are sold with secured financing or the sellers taking back a note. "We'll continue to see a big turnover as the baby boomers sell out."

Mack said he believes about 250,000 businesses worth $50 million or less change hands each year in the United States. Of that total, about 50,000 businesses sell for between $1 million and $50 million.

Sale prices rise

In 1999, there were about 9,200 business combinations involving deals in excess of $1 million, according to Mergerstat, which tracks private deals. The sales price of small companies is also increasing, from five to six times earnings before interest expense and taxes (EBIT) in 1992, to six to nine times EBIT in 1997, according to a report issued by the Arthur Andersen Center for Family Business.

But, because most small businesses are privately held, the public rarely reads or hears much about these deals. And, there is no requirement to report these transactions, so statistics are based on IRS reports, Dun & Bradstreet research and other sources.

If you are seriously considering selling your business, Mack said the first step is to obtain a realistic idea of what your business is worth from an objective, outside source. He said that many business owners are often way off base about the true value of their company. It's also important to understand the sales process and assemble a team of professionals you can trust, including an attorney and a tax accountant.

Mack's company has an offline business, as well as an online presence at www.USBX.com, with a database of about 15,000 buyers. Customers pay a $20,000 retainer, which includes the cost of a detailed valuation report. USBX also sells a simple valuation for $2,500 and a 50-page more detailed version for $10,000. Sellers pay a small fee to list their business on the site.

Another firm serving privately held businesses relies on a different business model. Costa Mesa-based Emerge Corp. collects a fee when the deal closes. Emerge, founded in 1998 by Ronald Speyer, president and CEO, has about 1,500 businesses listed online.

"We try to democratize the process," he said. "We put a valuation calculator on our site so people can find out what their business is worth. We give business owners access to information and buyers."

Speyer, who previously worked for the Geneva Cos. and W.R. Grace, said people sell businesses for three reasons: personal, financial and the company's need for growth. He said that some entrepreneurs realize they are better suited to building a business from scratch, but they'll readily admit, "I'm not the guy to build the business to the next stage."

Increase value

It's important to increase the value of your business everyday, even if you aren't planning to sell it, Speyer said. Value builders include: getting your balance sheet in order, documenting all systems and procedures, building a strong management team, recording all contracts and hiring the best people you can. You should also be on the lookout for prospective buyers in your normal course of doing business.

"People think their buyer is across town, when in reality they may be far away, or above or below them in the production or supply cycle," said Speyer, who predicts that lower interest rates will fuel business sales.

If you are thinking of selling your business, you should do everything you can to make it profitable. Scott Cook, founder and chairman of Intuit, the dominant player in the small-business accounting-software market, shared these thoughts with me in a recent interview.

He suggests these profit-building strategies for all business owners:

"The best way to make money is to stop losing it," said Cook. "Understand your costs cold and unload unprofitable operations."

"Change your culture when you need to," he said. For example, Cook said he recently overruled longstanding objections by his employees and opened up Intuit software to work with other industry-specific software programs. Now, QuickBooks Pro will be able to interface with programs developed by 1,500 software developers, Cook said.

"Branding is earned, not bought," he contends. "The fastest way to separate a company from its money is to hire an advertising agency. You build a good brand by winning customers one at a time."

"Truly revolutionize customers' lives," Cook concluded. "Make their lives dramatically better. We solve the real business problems facing business owners everyday. It ain't glamorous, but that's what we do."

Jane Applegate is the author of "201 Great Ideas for Your Small Business," and is CEO of SBTV.com, a multimedia site providing small-business resources.