Value Your Home Computer Data

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.

How To Create Business Value

What are the key value drivers when preparing your business for sale?  Several inter-related factors help determine the salability and value of a privately held business. A successful business sale depends on attention to each factor.

Ultimately, a business sale is usually structured based upon a multiple of cash flow (either EBITDA or Discretionary Cash Flow). To facilitate a business sale, an owner must have all of the financial records segregated and in good order. At a minimum, buyers are interested in reviewing three years of historical financial statements and tax returns. Differences between taxable income and book income (e.g. cash basis vs. accrual) should be identified and explained. Identifying, explaining and eliminating significant discretionary expenditures along with unusual and non-recurring expenditures and losses also are important.

To better showcase your business to potential buyers, you should identify all products and services provided by your company, specific markets served and the future potential of each. You also should define the strategic advantages enjoyed by the company in your respective niche markets as well as comparative gross profit margins for each product and service with an emphasis on which of your customers are most profitable.

Future Growth Prospects
While buyers generally purchase a business at a price predicated on current and historical cash flows, the main impetus for their purchase is often their understanding of how to grow the business at a rate that exceeds the norm for similar opportunities. It is important that you as the seller help define these growth possibilities and outline them in terms of product extensions, existing products to new markets, better market penetration, wider geographical distribution and any other distinguishing prospects.

Management Team
Buyers are concerned about the depth, breadth and ability of your management team and their willingness to stay on board after the deal is consummated. This helps mitigate concerns about retaining and transitioning current customers after an acquisition. You should prepare an Organization Chart which defines the direct reports to the CEO along with their titles, backgrounds and responsibilities. You should also build management profiles that provide brief resumes of each manager along with salaries and tenure with your company.

Deal Structure
Many privately held companies are sold as asset sales (versus stock sales). Asset purchases allow the buyer to step-up the value basis of the purchased assets. This may generate future tax deductions for the buyer while concurrently avoiding unwanted contingent liabilities resulting from a stock sale. As an owner, you should consult with a CPA and a tax attorney to understand the significant tax implications resulting from each scenario so you won’t be unpleasantly surprised at closing. Remember, it’s not what you get in gross proceeds but what you keep as net proceeds that counts!

Financing Sources
Most owners prefer to be cashed out completely at closing with little or no owner financing. This is highly dependent on the cash flow character of your business including “add backs” to net income such as depreciation, interest and excessive owner compensation. Most lenders typically shun discretionary add backs that fall outside these parameters. In aggregating the cash flow, lenders will consider: the required compensation of a new owner, the debt amortization period, debt coverage ratios and available collateral to determine the extent of financing availability.

Many items must be addressed in preparing for a successful business sale. If you spend more time today developing answers to these questions, you will receive dividends in the future with an easier due diligence period, a smoother close and less anxiety overall.

Different Types of Buyers

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.

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.

What Are Your Options If You Want Out of Your Business?

Think your business is successful because you’re financially profitable? Think again. Your firm’s success isn’t complete until you’ve found a way to get those profits out.

Selling the business to investors is one way to do that. But there are other ways to exit a company, and you should consider them all before deciding that a sale is right for you and your firm. Here are five exit strategies available to most entrepreneurs:

Let it bleed.

One exit strategy is simply to bleed the company dry. Pay yourself a huge salary, reward yourself with a gigantic bonus, and issue a special class of shares that pays high dividends.

Although a bad practice in public companies, this isn’t always a bad idea for private companies. Rather than reinvesting money to grow your business, you keep things small, take out a comfortable chunk, and live on the income.

Remember, though, that money in the wallet is no longer money in the business. If you’re in a business that must invest to grow, taking out money can hurt your company’s future prospects. And if you have other investors, taking too much may not be fair to them. If you pursue this strategy, minimize your dependence on other investors, and structure the business to allow you to draw out cash as needed.


Another strategy is simply to call it quits, close the business doors, and sell off the assets. Remember, though, that any proceeds must be used to repay creditors; the remainder gets divided among shareholders.

Friendly buyer.

If you’re emotionally attached to the company you’ve built, you might transfer the firm to a customer, employee, or family member who will preserve your legacy. In this arrangement, the seller often finances the sale and lets the buyer pay the debt off over time. Handing the business off to a friendly buyer lets the owner make more money than in a liquidation, but it preserves the business and gives the buyer an opportunity to run it..

The purest friendly buyout occurs when a family member buys the business. A family transfer only works, however, in a family that can manage the takeover peacefully. If yours tends to fight, the business will give them a golden opportunity to do just that. While they argue, your firm will slide into disrepair. Good planning and clear instructions can help.

Strategic acquisition.

Sell your firm to another business, and you exit the firm and leave your children a financial legacy while saving the business from second-generation ruin.

Choose the right buyer, and you can command a purchase price that’s based on much more than your company’s future cash stream. An acquirer may be able to use your firm to expand into a new market, offer existing customers a new product, or develop critical capabilities faster than they could alone. They’ll pay for those opportunities.

Acquisition does have a dark side. If there’s a bad fit between the two companies, the combination can self-destruct, with managers working more to quell inter-company strife than to move the firm forward.


There are millions of companies in the United States, and only about 7,000 of them are publicly owned. Some of those were spun out of existing publicly-traded companies, making the number of public companies founded by entrepreneurs even lower.

There’s a good reason for that. Initial public offerings are expensive, complicated, and time-consuming. They begin with a company spending millions on a road show that’s designed to convince investors and Wall Street analysts of the firm’s worth. If all goes well, they end with a firm that has a more complicated corporate structure, a greater number of rules to follow, less flexibility in running the company, and analysts who want information every 90 days.

Professional investors with a track record of taking companies public are an IPO’s best managers. If you’re the principle entrepreneur and have done a great job protecting your equity, you’ll make some money, too—but possibly at the cost of your sanity.



Your Business Through a Buyer’s Eye

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.

When To Sell?

That’s the $64 dollar question and we’ve been asked it by business owners for over 25 years. Frankly if we could answer it, we’d already be sitting on a beach somewhere enjoying the sun and relaxing.

So, the honest answer is, “We don’t know when you should sell your business.” But, we do know that there are three things that you must be aware of and that must be in alignment to drive the highest value for your business:

  1. Your intention to sell or “Owner Motivation”
  2. Your business’ performance or “EBITDA”
  3. Your ability to find multiple, qualified buyers or “Market Performance”.

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Who’s Your Competition?

You think about this question every day your business is open. But have you ever considered it relative to selling your business? If you haven’t, it’s time to start. Consider this…

The number of small businesses is the US is a moving target. But, according to Cornel University, there are more than 12 million privately held businesses in the United States and over the next 5 – 10 years, 70% of those companies are expected to change ownership. That’s a lot of companies at any point in time that could be for sale. You need all the help you can get.

As one of the owners of these “small businesses”, you must have an understanding of the market forces that will be at work during that time. Armed with this understanding, you’ll be able to make decisions that will allow you to unlock the wealth your business represents (in other words, the stock you own) into cash.

How Many Buyers Are Three, Really?
There are literally billions of dollars in the form of committed funds (private equity funds) that are looking to purchase “good” privately owned businesses today. We believe, competition for “good”, privately held companies is going to be fierce for the foreseeable future. That will keep “good” company valuations strong.

You should also know that there aren’t that many “good” companies. You need to continually monitor your performance to know when your company is “good” and then sell it when the time is right. This will also make it better positioned in the event that you’re forced to sell.

Forced to Sell!?!?!
Yes, forced to sell. As a small business owner, you know “stuff happens”. Something could happen to throw your personal life into turmoil (for example, a divorce or death). Business performance may slump due to an overall industry down-turn. The company may be doing just fine, but better days are ahead.

And finally, you need a reasonable level of assurance that there will be several buyers willing to compete for the privilege of owning your company.