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10 tips to keep in mind when selling your alarm business

victorharding.jpgMost alarm dealers sell one business in a lifetime and the proceeds from that sale are crucial to their retirement. At the same time, most alarm dealers don’t know much about the process of selling a business and what to expect or do.


February 25, 2010
By Victor Harding

Topics

1.    Make sure that you are selling for the right reason

Good reasons for selling are reasons like you want to retire or you want to pursue another business opportunity- what you might call personal reasons. A bad reason for selling is for price. If price is the reason you are selling, you almost never will be satisfied. In the end, most small companies in the alarm industry and elsewhere are sold for personal reasons.

2.    Like every other initiative in business, you have to prepare for a sale

First you have to prepare yourself for the time that it will take out of your life to execute a sale. Second, you need to know what you are going to do after. Thirdly, you need to prepare your company for sale. This means doing things like getting your books in order.
Most potential buyers will want to see a couple of years of financial statements and tax returns. You also should get your account base in order. That means collect old receivables, try to get contracts signed where possible and generally get the files on the accounts in order. Finally you need to know exactly what you have for sales. It is surprising how many alarm dealers cannot tell you how many accounts and how much RMR they actually have. The better organized you are as an owner, the better impression you give and the higher the chances of getting a better price.

3.    Investigate the tax implications of selling

Included in the preparation phase is investigating the tax angles of selling your business. You need to talk to a good accountant. Should I be selling shares or assets? If I am selling shares, do I have the shares of the company in enough family members’ hands to protect the full purchase price? Is my company big enough to justify a buyer buying shares? Will Revenue Canada pass my company for a share sale allowing me to get the personal capital gains tax exemption? If I don’t sell shares, what premium from the buyer should I get for selling assets? Also how do I handle the tax aspects of selling assets?

4.    Get proper advice and help when selling your company

Not many of us would sell our homes without a real estate broker. Selling a business is as tricky as selling a house or more so. The purchase price in selling your business can vary more than the sales price of selling your home depending on the advice and help you get. So why not use someone trained in how to sell businesses to help you sell your business?
Accountants and lawyers can give you some specific advice on parts of the selling process (i.e. taxes and terms in your purchase and sale agreement) but they are not trained in how to sell businesses. For example, they will not know the market for alarm accounts. They will not know who all the potential buyers might be. Only a business broker knows what owners go through in making the decision to sell, what is involved in getting your company ready for sale, what kind of selling package to create about your company and the potential buyers to approach about your company. They also have the experience in negotiating and closing the deal.
Too many alarms dealers sell their businesses to another alarm player who is more experienced than they are without a business broker in their corner making sure they get the best possible price and the best possible deal. Buyers always have a team of people working with them. Why shouldn’t you as a seller have someone too?

5.    Learn as much about the selling process as you can before you sell

Not only can a broker steer you through the process but they can also explain the process to you ahead of time. It is important that you know what the sales process will be step by step. How long will the process take? How much of your time will it take? How will the market value the assets in your business? How much is your installation and service revenue worth? How does a buyer calculate the value of your accounts? Why does deferred revenue come off the gross purchase price? What sort of pay-out should I expect? Do I have to guarantee the accounts and if so for how long? The more you know the better off you will be.



6.    Be realistic about your price

The facts are that small and medium sized businesses in all fields — not just security — do not command the premium multiples that large companies do. You cannot compare the multiples that companies like Voxcom, Intercon, or Sonitrol attracted to what you will get for your business. Also, just because some smaller alarm companies (1,000 accounts) sold for 36 times RMR back in 1998 or 1999, does not mean that you will be able to match that price now. Moreover, buyers and their banks from those heady days in the late ’90s have seen the error of their ways. My experience since then is that it is very, very rare that a 1,000 account company is sold for 1998-99 prices.

Remember also that for the buyer it is not really the multiple paid but the cash flow derived from a deal. We like to express prices as multiples but when the rubber hits the road, it is about what cash your account base can generate. Do a realistic calculation of what that cash flow will be for the buyer after monitoring charges, service costs, billing and costs and then see what is left over. To get at your purchase price, multiple that cash flow number by a multiple of anywhere from 3-5 times.

7.    Be sure your company is properly marketed

Let’s use the analogy of selling a home again. One reason why you hire a broker to sell your house is that this will get your home listed on MLS so that literally anybody anywhere in the world can see that your house is for sale and what the particulars are.
The same applies to your business. Too many alarm dealers sell to the first player that comes along. If you hire a broker, he or she should create a selling package highlighting the strengths of your business and then market it to as many potential buyers as possible. Both parts of this process — creating an accurate but compelling selling package and then pitching it to as many buyers as possible — are very important
Potential buyers can be competitors, complimentary players, and individuals looking to be a small business.

8.    Make sure you get multiple bidders for your company

Of all the tips given here, this is probably the most important. Having multiple bidders can offset many other adverse conditions to your sale — slower economic times, a particular weakness to your business or the need to sell in a hurry. Time and time again, it has been shown that when sellers get multiple bidders their price and terms improve. And make sure that you do not eliminate any of the bidders until you have a signed Letter of Intent or the equivalent from your No. 1 choice.

9.    There is more to focus on than just the multiple or price

Several other terms in any agreement of purchase and sale are also very important. What are the payment terms? How much will be paid up front? How much if any will be held back and for how long? What value is given to installation and service revenue? What multiple will be paid on non-monitoring recurring revenue items like guard or maintenance revenue? What about the non-compete or non-solicit?
All of these terms can affect the deal dramatically and affect your take home purchase price.

10.    The deal is not over just because you have the transaction closed

In most sales of alarm companies, anywhere from 10-50 per cent of the purchase price is still outstanding after the closing has happened. This alone should keep the seller focused on doing everything possible to maximize his ending purchase price. Most deals have a 12-month attrition guarantee written into them by the buyer. This means the seller has to guarantee that all the accounts he sold continue to pay for at least a year. This then means that it is in the seller’s interest to make the transition on the accounts and other aspects of his business to the buyer as smooth as possible in order to minimize attrition.
I always advise sellers to plan to be available in some way for the length of the attrition guarantee period in order to help save accounts. I also advise sellers that they need to understand the broad outline as to how the buyer is going to go about the integration of the accounts being sold. All of this will affect the customer’s feeling about the deal. 
From my own experience, the sales of alarm companies that go well are the ones that are characterized with the following:

•    The owner was not selling for price but for some other personal reason
•    The owner had prepared himself and his company for sale
•    The owner had reasonable expectations as to price
•    The owner got good advice and help in executing the sale
•    There were multiple bidders for his company
•    The owner worked out a good deal for himself after
•    The owner stayed around to ensure a good transition

I hope this is a help to you all. Next month I will talk about 10 Tips for buyers.

Victor Harding is president of Harding Security Services Inc. He can be reached at victor@hardingsecurity.ca
 


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