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Anatomy of an alarm deal

Owners ask me what is involved in selling their company if they use a broker like me. The following are the key steps:


November 3, 2014
By Victor Harding

Topics

Starting the sale process when using an intermediary: In my business, the process gets going mostly when a dealer contacts me to inquire about using my services to help them either sell or value their business. I have learned over the years that it is better to wait until the seller contacts me rather than the other way round.

What I need to know in the initial conversation: What is the size of the business in annual revenues? If it is an alarm company, how many accounts do they have and how much RMR?  How much money is the company making? Is the owner committed to selling or are they testing the waters? Are they committed to using a broker, and if so, is it me?  Do they want to sell shares or assets? How quickly do they want to move? Do they have any price expectations in mind? In short, I need enough information to determine if the owner is serious enough for me to go to the next step.

Drawing up the brokerage agreement: Every broker will ask an owner to sign a brokerage agreement. This agreement will lay out some or all of the following terms. (Some are more negotiable than others.)

Is the broker asking for an “exclusive,” meaning the owner not work with anybody else for the term of the agreement? Most brokers will only work exclusively.

What term does the agreement have? Mostly I see one year with the option to renew. I will go with less time if it looks like a straight-forward sale. What commission rate is the broker looking for? I have seen anything from two to 12 per cent. Most security brokers operate from four to eight per cent, depending on the size of the deal. What are the payment terms for the broker’s commission? Mostly, brokers get paid when the deal is done. That is what makes business brokerage a risky business. Many deals do not get done. Some, like me, take a partial payment when a milestone like a Letter of Intent is signed. A non-circumvention period is the length of time after a brokerage agreement terminates in which the broker will still get paid their commission if a deal is done with a lead generated while the agreement was active. This is to protect the broker.

Building the confidential business review or selling package: Once the brokerage agreement is signed, the big task of creating an attractive and informative selling package begins for the broker. This requires the broker to get more information on the company — three years of financial statements with explanations where required, a breakdown of the customer base and any monitored accounts. Building this selling package is usually the most time-consuming part. The skill in building these packages is based partly on knowing what buyers want to know and partly on illustrating what makes this business unique. The package needs to cover all the major bases but with a marketing hat firmly on.  In the next article I will cover the remaining aspects of most deals. 

Victor Harding is the principal of Harding Security Services (www.hardingsecurity.ca).