(FORTUNE Small Business) – "I'll tell you my best story about selling a business," says Larry Freeman, 65, founder and chairman of Freeman Cosmetics. Freeman, who once hosted a short-lived syndicated TV show, Larry Freeman's Woman's Page, is trim, tan, and handsome, with a full head of silver hair. Tonight he's having dinner at La Dolce Vita in Beverly Hills (Phil Spector is at the next table, free on $1 million bail) with his son, Mark, 41, CEO of Freeman Cosmetics, his daughter, Jill, 38, VP of marketing, and a guest. "It's not a personal story," Freeman continues, a little embarrassed by its tone. "It's kind of a gag. About the guy who walks into the bar, sees his friend, and says, 'What are you doing here? You're drunk and you're crying. How could somebody like you be so unhappy? You've got a beautiful wife, you have a prettier mistress, and you have the football team.'

"He says, 'No, that's the problem. I don't have a football team anymore.'

"'What happened?'

"He says, 'The bastards gave me too much money for it.'"

We should all have such problems, the guest is thinking, but the Freeman family is beyond such cynicism. In July 1998, having set out to raise a little capital, the Freemans wound up selling their cosmetics company, which had reached annual sales of $70 million, to Dial, a $1.3-billion consumer-products giant. They got far more for Freeman Cosmetics than they ever imagined--about $80 million, cash.

Larry was already semi-retired. Mark was a young father with two small children, and Jill was eight months pregnant with twins. Another family might have toasted its astonishing good fortune and moved on. But entrepreneurs and their creations are not always so easily separated, especially when they share the same name (for other examples, see the box on this page). The Freemans' windfall was thrilling, but somehow it didn't compensate for what they were losing: Shared history, family glue, a powerful sense of identity. Larry took it the hardest, understandably. Freeman Cosmetics was his legacy. The kids weren't there yet. But all of them cried on the day they sold their company; they huddled together in a bathroom where they'd fled from the bankers and the lawyers. The sadness lingered, says Larry, "for five years and 76 days."

Experts say that the Freemans' reaction is typical among those who've sold a treasured family enterprise. Denise Kenyon-Rouvinez, an associate with the Family Business Consulting Group in Marietta, Ga., has studied what she calls "serial business families"--families that sell one business and start another. About one-third of those, she says, end up buying their original businesses back. Even those who try to take it easy after selling out often miss the sense of purpose they got from the business. "Remorse is very common," says Eugene Muscat, director of the Gellert Foundation Family Business Center at the University of San Francisco. "If you were a business owner and then all you are is just a rich person, that's a big fall from grace."

In 1961 Larry had followed his father into the beauty business, as his orphaned father before him had followed his uncle. The Freemans were manufacturers' reps in those days, selling shampoos and lotions and creams, a family tradition that originated in New York City and skipped across the continent to Los Angeles, where Larry grew up.

Larry's father died suddenly in 1967--bad heart; he was only 54--leaving Larry and his younger brother, Richard, in charge of what was then the Freeman Sales Agency. The boys were both in their 20s. They were ambitious, they had ideas, and in the early 1970s they made the leap from selling other companies' products to making and selling their own. They launched one of the first mass-market shampoos with organic ingredients. "Clear bottles with pink goop inside and white writing," is what Jill remembers from her childhood--and on the labels, her family name. But the introduction of the Freeman line made it hard to keep selling competing products. "We woke up one morning and discovered we were all by ourselves with this business," says Larry.

It took them a while to get their bearings. By 1984, Freeman Cosmetics had sales of $5 million but was losing money. The brothers were personally on the line for loans totaling $500,000. And in May of that year, Mark, just out of college and working in the record industry, was diagnosed with non-Hodgkin's lymphoma. He came through (nearly 20 years later, he remains cancer-free) and when he finally felt well enough to go back to work, he chose to join his father. Larry's brother Richard, meanwhile, decided to move on.

So now it was Larry and son Mark. Larry expresses how he felt about their pairing with another story; apocryphal, probably, but this time it's personal. About walking through an "old Italian neighborhood" in Brooklyn and seeing a building with a sign on it saying SPAGNOLI & SON PLUMBING, and becoming "emotional." Because for every business that survives into the next generation, he knows there are more where "there never was a son, because the son went to Harvard or became a drug addict or whatever." Every day Larry felt more grateful to have his son where he belonged, at Freeman Cosmetics.

That was the start of a thrilling run for the company, marked by new products made with avocados, cucumbers, apples, and oatmeal and sold in colorful bottles that appealed to young buyers. "There was nothing we couldn't try," says Jill, who joined in 1991. By 1997 the company, which sold to an expanding roster of big-name retailers--CVS and Rite Aid, Wal-Mart and Target--was projecting annual sales of $80 million. Profits amounted to about 5% after taxes. Jill found her niche in marketing. Mark built an international division.

Larry focused on nurturing customer relationships--and on leveraging his wealth for good in the wider community. "A business is more than a business," Larry likes to say. "It's a platform to do other things." Such as? Well, in 1994, he opened a 165,000-square-foot-factory with jobs for 300 people in riot-scarred South Central Los Angeles.

From day one, Freeman's growth had been more purely organic than even its fruitiest shampoos. Not a dime of outside money had gone into it. Every year when the fourth quarter came, the boardroom debate centered on how much to spend on advertising and how much to invest in municipal bonds for what were now three families living off the business. But by the late 1990s sales had reached a level at which feeding the beast took more capital than the family wanted to commit.

"Do not bring me a buyer," Larry remembers telling the investment banker. "I do not want to sell this." Now Larry thinks maybe Mark and the banker exchanged winks. In any case, the family soon found itself weighing outrageously rich buyout offers.

Larry held out the longest, but not because he was personally unwilling to give up control. Mark was pretty much running the company. But that's just it. Larry wanted Drew, his oldest grandson, to have his turn someday. Jill had doubts about how the family would function without a company at its core. She wondered whether everything that kept them close--the regular Sunday dinners at Mom and Dad's, the biannual family vacations in Hawaii--was, in fact, dependent on their working together.

Ultimately Jill agreed with Mark that Dial's offer was simply irresistible. Larry still didn't like it. He didn't need the money, and anyway, he cared more about keeping control of the family name. But he accepted that his children were in another phase of their lives--the money would make more of a difference to them. And he reminded himself that Freeman Cosmetics wasn't going to disappear. They would all keep managing it. In the end, Larry chose not to stand in the way of his children. Still, all of them cried on the day the deal went through.

Four days after passing papers, Larry stepped off a cruise ship in Anchorage. There, in a drugstore, he found a display of Freeman products. Some were hidden behind a pole. "So I moved them," says Larry. "That's what I've been doing my whole life."

Larry was nominally in charge of Dial's personal-care division, now including Freeman Cosmetics. But six weeks after the sale, as Larry recalls, Dial chairman Mal Jozoff told him: "Stay home, collect your checks."

To the family, Dial's every move seemed to contradict what the acquirer had promised it would never do: that is, Dialize Freeman. Dial quickly slashed by one-third Freeman's roster of products. Sales soon settled into a gradual decline (see the chart on the previous page). Then Dial closed the factory in South Central. Fed up, the Freemans walked away from employment contracts totaling $2.5 million.

In 2001, Dial announced plans to sell both companies in its struggling personal-care division, Freeman Cosmetics and Sarah Michaels. The move was hardly unexpected as far as Larry was concerned. For three years he'd been following Freeman's slumping fortunes with equal parts sadness and anticipation. "On the one hand I wanted them to grow the company," says Larry. "On the other hand, I knew they couldn't." Now he saw his chance to prove that the family could succeed again where Dial had failed. Dial, however, refused to break up the division; it wound up selling both brands to an investment firm called the Hathi Group. Larry immediately offered to buy Freeman from Hathi. That offer was refused.

But Hathi had no more luck with Freeman Cosmetics than Dial had. And so this past September, the Freemans joined others bidding on assets of the bankrupt Hathi Group. This time, they got what they wanted. Later Mark would insist, "We were the least qualified bidders. There were people who knew so much more about the existing business, had looked at the customer base, at inventory, all the problems. We had done none of that. Ours was an emotional situation--'First let's get it, then we'll look at it.'"

They paid less than $10 million (Hathi had bought Freeman and Sarah Michaels for $12 million.) There were tears again--but only from Larry, who'd been suffering seller's remorse "from the minute we shook hands" six years earlier. By contrast, the kids had started another business, a 70-unit chain of salons called Pure Beauty. When their noncompetes expired in 2001, they even started another cosmetics company, and they were already looking for investors. Larry played a secondary role in both ventures, but for him nothing could replace the business with his name on it. "During that whole time," he says. "I was watching Dial destroy what it took me 25 years to build."

The new headquarters of Freeman Cosmetics is a suite Freeman outgrew years ago. Now Larry, Mark, and Jill are back at the same desks. Not much else is the same. What was once a vertically integrated enterprise with nearly 400 employees is now a lean, 25-person sales-and-marketing outfit with plans to outsource manufacturing. For Mark, it's a relief not to have to worry about factories anymore. Manufacturing is "not a strength of my family," he says flatly, which is not something the Freemans would have known--or been able to admit--about themselves before.

But then, the Freemans have changed. From their experience of building Pure Beauty, they've learned that they don't have to own 100%. They know that growth by acquisition is not such a bad route. "We've done it organically in the past," says Mark. "It takes a long time. If we could bring in the right partner, someone who understands the business and recognizes that we're pretty good at it, we'll be able to get where we want to go faster."

Is that what Larry wants this time? "I still have somewhat of a peddler mentality," he admits. But he recognizes that his kids have their own ambitions, and that any investors they recruit will want an exit strategy. "It may be that ten years from now somebody makes an offer so big we have to take it again," he says. He's trying his best to sound excited about that.