At work, you probably have an IT person who makes sure your servers and desktops are backed-up.  But what about your home computers?  I hand’t thought about it until my 16 year old came to me one day and said, “my laptop is acting funny”.

Turns out her hard drive was going bad.  The drive wasn’t dead so I was able to backup the drive and install a new one without major issues.  However, during that process I did some checking on the data that she had on her computer, which in turn made me think about the data on the rest of our computers.

What I found is that my daughter’s computer housed the bulk of our iTunes library.  An impressive (or is it ridiculous) 4,123 songs.  At $.99 per song, the value of our music library itself was close to $4,000.  I did some checking with Apple and found that they do not offer a “redownload in the event of a hard drive crash” service.  In other words, if you loose your songs, you buy them again.  Yikes!  Then I started thinking about school projects, pictures, business correspondence done on the home computer instead of work computer, etc., and decided to do some research into home backup alternatives.  Here’s what I found . . .

If you have a network (wireless or wired) take a look at a product from Microsoft called Windows Home Server.  Check out the products page which shows several “plug-n-play” options from various vendors.  Setup and use of this product was easy, especially if you purchase a preconfigured unit.  Just take it out of the box, plug in the power and a network cable and follow the instructions that appear on the screen.  Windows Home Server will backup a maximum of 10 computers, both Windows and Apple Mac’s, and does it painlessly, automatically and continuously.

If you only have one or two computers at home or don’t have a home network, it may make sense to look at alternatives.  If you have a Mac, check out an Apple product called Time Machine.  If you have PC’s like I do, check out Genie Time Line or Rebit.

All three products allow you to connect an external hard drive, a USB drive for example, to your computer and manage a continuous, time-based backup.  In other words, these gizmos make backups of your data as it changes.  Accidently delete a file?  No problem, two or three clicks and the file is restored.  Save changes to a file and wish you could see the previous version?  No problem, two or three clicks and you have both versions on your hard drive.

Different buyers have different objectives and levels of experience. Understanding these differences can help you in getting the kind of deal you want. As you begin discussions with potential buyers, it’s important to keep in mind that buyer’s goals and objectives vary greatly. In general, buyers can be classified into three groups:

• strategic buyers (public and private industry competitors)
• private equity groups
• individual or “angel” investors

The valuation you get for your company will vary based on the type of buyer:

As the graphic shows, individual investors generally value companies at the lower end of the valuation range.  Strategic buyers value on the higher end of the range.  Private equity funds can value low, depending on the fund and whether your company is the first one of its’ kind in their portfolio OR they can value high if your company is viewed as an add-on or adjunct to a company they already have in their portfolio.

Each group presents a unique set of advantages and disadvantages that can impact the sale. Understanding these differences will help in your negotiations and in finding the buyer best-suited to meet your business and personal goals.

Strategic Buyers
Strategic buyers are driven by potential synergies and associated cost savings between the acquirer and the target entity. For example, you may have a product or service that the buyer lacks, but is highly complementary to their product or service offering. Or, you may have an established presence in a certain geographic or customer market that the acquirer has had difficulty penetrating.

This focus on synergistic value may result in higher offers from this buyer group than from others, since the operational efficiencies that are created can provide immediate higher profitability and a more rapid return on investment for the buyer. Public and private strategic buyers differ in that the liquid market for public company shares may create a more aggressive valuation for public firms over those that are private. This may allow the publicly traded company to pay a premium price for your business, especially if you’re willing to accept a stock-for-stock transaction. However this is not always the case as private strategic buyers today have access to capital at historically low cost.

Corporate structure after the sale may also differ with a sale to a strategic buyer. For instance, unless management is viewed as absolutely critical to maintaining company performance, strategic buyers generally don’t require that the active, selling shareholders remain with the company much past a short transition period (generally six months to a year). Also, depending upon the size of the target and the logistics involved, the buyer will oftentimes completely absorb the target company into its current operations—disbanding the old company’s operations—making the ability to relocate the target company an important consideration.
An additional consideration for is the clarity of historical corporate records. Large buyers are particularly sensitive to potential liabilities (licensing issues, outstanding contracts, taxes, etc.) that they may become liable for upon purchase. Therefore, as is the case with virtually all transactions, it’s recommended that any outstanding issues be identified and clarified prior to discussions with a strategic buyer.

Private Equity Groups
Private Equity Groups represent a formal investment fund (or a number of related funds) created by a group of investors for investment in, and purchase of, closely held businesses.  The strategy and focus of these groups varies. Some groups focus on specific industry segments, while others are more concerned with the geographic location of the target. Certain investment groups may achieve the same synergies with an acquisition as corporate buyers, particularly if the group is building a portfolio of businesses for a “platform” company within a specific industry. In any case, the private equity group’s primary focus is to achieve the highest possible financial return for its investors.

Since investment groups generally prefer to let their portfolio companies continue to operate on their own, the preference is for the existing management team to remain intact and continue operating autonomously after the sale. Additionally, these groups usually have a planned exit strategy and expect to hold a portfolio business for a pre-determined period of time, which usually is between five and seven years.

Individual or “Angel” Investors
Individual investors are high net worth individuals seeking to own and manage their own business. Individual buyers expect to be integrally involved in the leadership and management of the company after their purchase. This buyer segment is usually more focused upon the geographic location of the target than its industry, as the buyer is typically not seeking to relocate.
Most individual investors are seasoned businesspeople, with experience in either corporate positions or other entrepreneurial ventures and ordinarily prefer established businesses with proven performance to newly started companies. Due to capital constraints, individual investors usually purchase businesses at the smaller end of the middle market spectrum by performing leveraged buyouts that often include seller financing.

Conclusion
Keep in mind that the payment portion of a buyer’s offer should not be your only focus in a transaction. Your understanding of the buyer’s ultimate plans for the business, their expected level of involvement and network of resources, are all important considerations. Knowledge of a buyer’s expectations for the business can be highly beneficial for both negotiations and the closing of a successful deal. You need to be concerned about both the pricing and the terms of any deal, and choose the alternative that suits you best.

You know everything about your business or so every business owner assumes.  Many experience a rude awakening, however, when they attempt to sell or recapitalize their business and the buyer begins the due diligence process.  The bad news is that you can’t avoid the due diligence process if you ever intend to sell or recapitlize your business.  However, you can predict how buyers will generally approach the process of due diligence and prepare for it.  Here are things that are important to all buyers we’ve ever encountered and questions that you will be asked:

1. How much cash does the company generate?Buyers want to know how much free cash flow your business generates. They’ll want a reasonable salary for the business’s CEO, as well as enough additional free cash flow to pay for the business over five to seven years.
2. How loyal is your human capital? In many cases, a business’s human capital is more valuable than its’ inventory and equipment. Investors will be interested in how long key customers and employees have been with you; longer tenures increase value. If managers have signed non-compete agreements and customers are bound by long-term contracts, your business is worth even more. Short relationships, on the other hand, mean increased risk and lower purchase prices.
3. Will any liabilities pop up in the future? Buyers rarely want to assume liabilities that precede their ownership, mostly because they have no way of accurately gauging the amount of risk and exposure involved. Resolve whatever issues you can before you sell, and help buyers understand any remaining liabilities. Buyers may push for an asset purchase to avoid pre-existing liabilities.
4. What’s your corporate structure?  Whether your firm is an S-Corp., a C-Corp, an LLC, or something else, you have a set of unique tax consequences. Form (or revise) your company’s structure with an eye toward minimizing capital gains taxes and maximizing your net sale proceeds.  Ask the buyer to help you minimize taxes.  They don’t like paying taxes any more than you and will very likely help out if they can.
5. What is the state of your market? Buyers want to understand your industry, your market, and your company’s position relative to your competitors. Is your market growing? Are you able to increase your gross profit margins? What will your industry look like in five years? Be ready to provide buyers with answers.
6. Why do you want to sell?  Buyers don’t want to purchase a business in a downturn. Most buyers will readily accept retirement, divorce, or health issues as good reasons to sell, but loss of market share and declining margins will not attract good offers. Think about what is prompting the decision to exit the business now and write it down.  Buyers will appreciate your fore-thought and candor.
7. Can your business run without you? After the sale it will have to, so create and document systems and procedures that make independent operation possible.  Don’t think you can fake your way through this one.  Buyer’s can smell a business that’s controlled by the owner a mile away. You may need to hire additional managers or begin delegating more responsibility to existing managers, so that you are less critical to your firm’s health.
8. What drives your valuation above the net book value of your assets?  This question is also known as, “You think your company is worth what?!?!”  Make sure you can quickly and clearly communicate your unique selling proposition and brand identity; your company’s reputation and market strength.  Document the long-term relationships you enjoy with vendors and customers.  Finally, look at your brand and brand awareness: is it a trademark(™) or a registered trademark (®)?
9. How much do you want? Buyers don’t want to waste your time or theirs.  Don’t use guesswork or anecdotal evidence (a chat with your friend at the club) to determine your company’s market value. Buyers will calculate your free cash flow and generate what they believe a reasonable return on their investment. In general, they expect businesses to generate enough cash to pay the owners a reasonable salary and pay back the purchase price within five to seven years. Your price should support those expectations.
10. Do you have competent advice?  A seasoned team of advisors like a CPA, attorney, and investment banker will help in a couple of ways.  First, buyers will use this as another indicator that your serious about selling or recapitalizing your business.  Having these professionals on board and up to speed will help streamline the process greatly.

Work on these things now and you’ll not only get more money for your business when you sell it but you’ll also walk away from the transaction feeling much better.