Seven of 10 privately held concerns will transfer ownership in the next 10 years.

Most of those companies aren't prepared to do so, says Gary Douglas, president of Midmarketplace.com. The four-year-old portal serves midsize concerns and their advisers.

"They may know everything there is to know about widgets, but they don't know how to put together a team of experts to maximize the value of their business," Douglas said. "Most have no idea what their business is worth in the real world."

Looking at your publicly traded counterparts doesn't help if you run a bakery or a barber shop. And major investment banks won't work with you when their target clients have hundreds of millions of dollars in yearly sales.

Douglas and Timothy Rhine, an investment banker and co-founder of San Diego-based PointeBreak Solutions, share tips.

** Get an objective valuation. The Alliance of Merger and Acquisition Advisors, a trade group in Chicago, can help. Its investment bankers, attorneys and wealth managers work with midsize firm owners.

** Erase emotions. "Make a cold-blooded decision of who you need on your team," Douglas said. "When you start a business with $50,000, a family attorney is adequate, but 25 years later when you have $100 million in sales, you need more firepower."

** Know your capital costs. Then try to lower them. Say a bank offers you a loan at 11%. That interest rate reflects how risky the lender thinks your company is.

Other sources of money include "small unit factors," or folks who buy a portion of your accounts receivable -- what customers owe. Say your invoices show you can collect $100,000. The factor will discount for risk and might pay you 50%-60% of that total, Rhine says.

** Increase free cash flow. If you now let customers pay in 45-60 days, try getting them to pay up sooner. On the flip side, when you buy raw materials, take advantage of the terms. If a vendor lets you pay in 60 days, don't write that check too soon, Rhine says.

"If you decrease your cost of capital, you'll increase your cash flow," Rhine said.

Other ways to boost cash flow: Make and sell more profitable goods, borrow less money and reduce your reliance on factors.

** Branch out. Diversify your products and broaden your customer base. "It's far less risky to have more customers and products," Rhine said. "That will also lower your cost of capital."

** Develop redundant expertise. Train several employees to become deft in each area.

This way, you're not reliant on any one person and you decrease business risk.

You also strengthen the operation so it remains sturdy without you. This makes the company more appealing to potential acquirers.

"Most people want to buy a business, not a job," Rhine said.

BYLINE: GLORIA LAU

SECTION: LEADERS & SUCCESS; IBD'S 10 SECRETS TO SUCCESS; Pg. A03

Investor's Business Daily

November 7, 2007 Wednesday
NATIONAL EDITION