When LS Lowry sold one of his earliest paintings to the literary editor of the Manchester Guardian in 1926, he had an immediate change of heart.

Arthur Wallace had edited a supplement for the Guardian to accompany a civic week organised by Manchester city council in October 1926, and featured three paintings by the then struggling artist.

As Wallace’s grandson Keith explains, Lowry was featured in an accompanying exhibition at a Manchester department store, and Wallace – who had fallen for his sooty panoramas of factory-bound crowds – offered to buy one.

“Lowry said with great daring: ‘Could we say £10?’ and Grandpa wrote a cheque. Then Lowry wrote back to him saying: ‘I think I’ve charged you too much. Can I give you another one as well?’ So Grandpa got two Lowrys for his £10.”

Going to the Mill, the painting that caught Arthur Wallace’s eye, is now coming to auction for the first time since that generous exchange, after the Wallace family finally decided to part with it.

The rare early work, which is to be sold by Lyon & Turnbull in London at the beginning of May, is a preliminary depiction of what would become Lowry’s classic subject, said Simon Hucker, a fine art specialist at the auctioneer.

“That mill and the chimney behind, the domed roof and then the wall of windows – he will paint that view for the next three decades. This is his subject and the little figures all scurrying towards a door, like water pouring towards a drain.”

What is especially rare is for a painting such as this to have had only one owner, Hucker added. A work of similar size and date sold from HSBC’s collection last year went for £1.2m, and the estimate for Going to the Mill is £700,000 to £1m.

As a child, Keith Wallace ate family dinners overlooked by the Lowry. “By the time I was a lad of eight, we kept it in the dining room, so we’d see it every evening over dinner and it was probably a bit grubby by then.”

It remained on his mother’s wall, “uninsured and unsecured”, until the family arranged a long-term loan to the Pallant House Gallery in Chichester in 2013, allowing the public to view it for the first time in more than 80 years.

Keith’s father sold the other work that Lowry gave to his grandfather “to pay for my two sisters’ weddings”, he said.

Arthur and Lowry remained in touch in later years, and Arthur’s retirement book from the Guardian included “a nice letter from Lowry saying ‘so sorry to hear you’re retiring through ill health’,” said Keith.

“They first met well before Lowry had any individual showings at any galleries. It was well before he was able to sell any work to any public gallery. He was very much struggling, and so we Wallaces like to think that at the very least [the sale to Arthur] gave him a bit of a boost and encouraged him to keep on painting.”

Hucker said it was possible to trace the development of Lowry’s signature style from Going to the Mill. “As he went on it becomes a little bit more stylised – that famous white background with black figures on – but here you’ve still got the sooty grey background which is a little more impressionistic, a little more realistic.”

The more you examine the work, the more you discover, he said. “Initially, you see this sweeping movement of the crowd and a great mass of people. But when you look more closely you see that they’re all individuals.

“There’s the woman standing alone looking out at us, in the style of Seurat, drawing the viewer into the lives of others, or the man carrying what seems like a large portfolio, who could be Lowry himself.”

Lowry was immortalised in popular culture through the one-hit-wonder pop song Matchstalk Men and Matchstalk Cats and Dogs by the folk duo Brian and Michael, released in late 1977 as a tribute to the artist who had died the previous year.

“But he’s much more sophisticated than that,” said Hucker. “This idea that he’s a naive painter who can’t paint any better … god, he can paint, he’s a proper impressionist. These people are not caricatures – he can give you the impression of a man with a couple of strokes at the brush. In these little tiny figures you get a lot of story, and that’s his genius.”