If I was selling
I thought it might be useful to lay out the issues in the order that I would address them if I was an owner and thinking of selling.
By Victor Harding
The points raised here are perhaps more pertinent to an owner who is planning to sell part or all of his company to a third-party and not to family members.
The first issue to address is whether your company is in good enough shape to sell. This could be a deal stopper right off the bat. Do you have at least three years of steady or growing profitability behind you?
Buyers base their prices mostly on past performance, i.e. three years of EBITDA. A seller I dealt with a few years ago did not understand why a buyer was making his purchased price contingent on good performance going forward despite the fact that he was currently making good money. It was because his company had sustained losses in the recent past.
Are your books, in the broadest sense of the term, in order? You need to have at least two sets of internal and external financial statements on hand just to get buyers to take an initial serious look.
Internal financials are useful because they often break numbers down better than the external financials do. Something that many sellers forget is the buyer will also want to see up-to-date financials for the year that you are in.
Moving on from the financials, ensure your company can pass a thorough credit check and background check which will uncover any liens, encumbrances or lawsuits of any kind. Better that you find them ahead of the buyer.
Next you should check on the lease for the space you are renting. When is the lease up? I have seen deals almost crater around a new owner taking a lease. Also, it is important to get the aging of your accounts receivable into shape.
Finally, even a simple thing like how your work space looks can make a difference. Think of selling your company as getting ready for a date or applying to a new school. Your company has to look good and not have any skeletons in the closet.
If you are an alarm company with monitored accounts — which would probably be the item of greatest value in your company — you have certain important things to consider. Are they on a signed contract? Are they on a call forward line? I lost a deal last year because the seller did not have either in place.
Let’s assume that you have addressed all these issues. Next, I would consider whether this is a good time to sell. Always try to sell your company in good economic times because:
• Your business will likely be doing better financially.
• Buyers will likely be more optimistic, more likely to buy and to pay up.
• There will likely be more buyers out there in good times.
We have been spoiled in the security industry. Throughout most of the 2009 recession and in the recovery after, security businesses, with the possible exception of integration businesses, were still being bought and sold for fairly good prices. My sense is that this was because security as an industry was growing. Secondly, the market loves recurring monthly revenue.
There is another very important factor pertaining to the timing of your sale: how many active buyers there are in your industry at the time you want to sell. This can make a big difference. Generally more active buyers will drive the prices up. In the 20 years I have been involved in M&A in the security industry, I have seen certain times that were far better than others. For example there was a period 10-15 years ago in the guard industry in Canada that Garda, G4S and Securitas were all very active in buying up smaller guard companies — a good time to sell if you owned a guard company. Not so much today.
Now let’s assume that your company is in good shape, economic times are robust and your industry segment seems to have lots of buyers. The next important step is to make sure your tax situation is set up as advantageously as possible.
Generally what I see is that the bigger the company, the more tax planning the owner has done. Unfortunately, too many smaller players have not planned for taxes.
If you find you have to take some specific steps to save tax on a potential sale, like making your children shareholders, you may have to delay the sale of your company.
Assuming you have taken the proper tax steps in advance, you still need to look at the comparative prices and take-home pay connected to a sale of the shares versus the assets of your company. This is because many buyers today will not buy shares. Canada offers a one-time capital gains exemption to all Canadian taxpayers for the sale of shares of a privately controlled Canadian corporation — so the default position is it is better to sell shares. But this rule does not apply to all situations. You simply have to talk to your accountant.
Victor Harding is the principal of Harding Security Services (email@example.com).