Points to consider before you make the sale
Those of you who know me will have seen some of the points below in different articles I have written but when you deal with sellers all the time and see the issues come up again and again, you feel the need to re-iterate some points.
August 16, 2016 By Victor Harding
One important piece of advice I can give an owner of any small security company who is thinking of selling is, don’t sell just for the money because you will most likely be disappointed.
Let’s define small here as any company that does under $2 million of revenue annually. Even if you are quite profitable, you will not likely hit a home run on your selling price unless almost all your revenue is recurring monthly revenue (RMR). If a large part of your revenue is RMR, then you have the opportunity to do quite well. Most sellers of profitable small companies realize before or after the sale that they could have made what they got in purchase price if they had continued to run their business for another two to three years. Small companies do not generally attract the same multiples that medium- and large-sized companies do. So I suggest that you should sell because you want to retire or because you have another opportunity to go to that is even better than what you are doing now — not just for the money.
In terms of timing, as to when to sell, contrary to what I thought and said when I first opened my business, I do think it matters when you sell, particularly if your security business is not RMR-based. Selling integration businesses in Alberta and southern Saskatchewan right now is certainly tougher than when oil was at $100/barrel. RMR-based businesses are not as subject to economic times.
My third piece of advice is to know what kind of company you really are and shape your expectations accordingly. If you are really an alarm company — for example more than 50 per cent of your revenue is RMR — expect to be able to sell your company fairly quickly, and assuming you get multiple offers, you should do quite well. Monitored accounts are always in demand. But as an alarm company, do not then expect that you will get great value for your installation or service revenue unless there is something exceptional about them. On the other hand, if more than 70 per cent of your revenue is installation revenue, then I would classify you more as an integrator, meaning it is likely your business will be valued using a “multiple of normalized earnings.” My experience here is that it will take longer and be more difficult to sell your business. I am finding that in Canada, if you are an integrator, unless you are doing $8-10 million annually, the selling process takes a lot longer. There are not enough buyers for what I would call quite successful, smaller integration businesses doing $3-7 million in annual revenue.
Thirdly, get a “pro” to at least give you a value for your business — even if you are just selling alarm accounts. A pro here means someone that a) knows how to value all kinds of security companies, including any RMR in them and b) also knows the buyers in the industry. This may sound like obvious advice, or even self serving, but since I opened my own M&A business seven years ago I have learned that there are more ways than I first thought that a good “intermediary” can help you through the sale process. Aside from doing most of the work connected to the sale, they should help assure you get the best price. They also should be able to apply their experience to shaping the rest of the terms in your deal to your best advantage. Chartered business valuators, on the other hand, know how to value regular non-RMR businesses. However they always seem to under-value RMR businesses and they will not likely know the security industry.
The last piece of advice I would pass along relates to how long the sale process will take and setting your expectations early in the process. RMR businesses can be sold fairly quickly, but even with a simple sale of alarm accounts, the process from start to finish can take six months if you canvas all the potential buyers. With integration businesses, I would increase the length of time it takes to complete a successful sale to a year.
These points are meant to help you in your decision-process if you are thinking of selling your business.
Victor Harding is the principal of Harding Security Services (www.hardingsecurity.ca).
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