(FORTUNE Small Business) – Last year I seriously considered selling our 40-year-old family business. With sales declining and losses piling up--and no certain end to the recession in sight--I felt I had little choice. My family doesn't have deep pockets to finance heavy losses, and through the first half of 2001 our Union City, Calif., company, Emerald Packaging Inc., which manufactures plastic bags, had posted over $200,000 in red ink. Worse yet, our bank, which had happily underwritten our growth through the 1990s, axed our line of credit. As a manager with only six years' experience, I had known only good times. I was frightened out of my wits.

So when two rivals came around and started talking buyout, I couldn't help but listen. Here, I thought, was an easy way out. Wrong. Both negotiations bogged down from the start. One company immediately blabbed to our customers that we were for sale. The other fought over how to define cash flow and wanted to exclude depreciation. Both companies wanted to buy us at a fire-sale price, and only one was willing to make employment guarantees. We decided to soldier on, and ultimately I was happier, and smarter, for it.

How did we find ourselves in this position to begin with? We entered the recession with a lot of debt, most of it with personal guarantees. Like many entrepreneurs, we invested heavily in capital equipment during the late 1990s, spending over $5 million on new printing presses and bag machines. We made those investments projecting increased, not decreased, sales. Plus our labor costs soared 20% during the first half of 2001 when we failed to police overtime and were forced to raise salaries to keep pace with the Bay Area's tight job market.

Our first suitor approached us because it knew we had problems. In our initial conversation, its chief exec said, "You guys have a lot of debt and recently lost one of your biggest accounts." That was about as sweet as his sweet talk got. After I willingly gave him a peek at our financials, his salespeople began telling our customers that we planned to sell. When I confronted our suitor, his reply ended our talks. "I can't control my salespeople," he said.

I knew my family would never sell to someone we couldn't trust. That wasn't the problem with our second suitor. I had a good relationship with its chief. We talked regularly about issues facing our companies, and I had been open with him about the tough problems I now faced. He offered to buy us, but for very little. He wanted to use earnings before interest and taxes as a measure of our worth, offering to buy us for three times EBIT. However, by leaving depreciation out of the formula, he sought to rob us of significant value, especially since our large investments had raised that component of our cash flow considerably.

My father wasn't about to sell for nothing the company he'd spent a lifetime building. He urged me to focus on survival. During the second half of 2001 we slashed our work force, capped overtime, demanded cost cuts from suppliers, and began cold-calling for new accounts. Our bottom line responded quickly. Thanks to a 25% decline in labor cost and a nearly equal decrease in raw material expense, we came out of 2001 with a small profit.

Today I realize we were not the only manufacturer balancing on the edge of disaster last year. Earlier this month I had dinner with a bag manufacturer much larger than us who opened the conversation by saying, "Wasn't last year awful?" As we navigate through 2002 with a healthy bottom line and solid sales growth, I am happy my fears didn't get the better of me. I feel I have earned my business spurs: I have survived my first recession.