Buckle up for business
Selling a company can be a bumpy road, but with the right preparation you can smooth out the ride
By Victor Harding
There are almost no deals I have done over the last 12 years which have been silky smooth from beginning to end.
Selling your company is almost always a bumpy ride that will test your patience and commitment. But here are some things you can do to make the ride a little easier.
First, make sure you are selling for a good reason — something beyond just the money, like a retirement or another business venture. Those who sell just for the money are almost always disappointed. In my best deals, the owner committed mentally and emotionally to something other than the purchase price.
Secondly, make sure you are really committed to sell, otherwise when the bumps come — and they will come — you may be deterred and decide to back away. The problem with doing this is you almost never do as well the second time around.
Third, have your “ducks in a row” in regards to your books and, if you are an alarm company, your monitored accounts before you sell. This means having three years of financial statements prepared by your outside accountant. The last two years should show good financial results. If you are selling accounts, make sure you have signed contracts, your panels programmed to your lines (not directly to the station’s lines) and monitoring rates above $25/month. It is amazing what a good impression having well-constructed financials showing good results can have on a buyer.
Pull a team together in advance and let them know you are selling. By team I mean, at a minimum, your accountant and your lawyer. The buyer will likely have a team of advisors on their side. You need your team and everybody’s input can be useful. Make sure the lawyer you are using has closed deals before.
Bite the bullet and hire a broker or intermediary to help you sell. But make sure the broker knows something about your industry and has closed deals. Brokers know the process for selling small businesses, which you probably do not. They will do most of the work of selling your business while you continue to run it. They will provide a rough valuation if you don’t already have one.
Also, having a broker helps maintain confidentiality. Moreover, they can provide objectivity when you are not in tune with what a buyer is asking. And what many do not realize is that having a broker increases the chances of actually getting the deal closed in a shorter period of time, and almost always increases the selling price. Talk to someone who has used a broker and you will see why it is a good idea.
Next, get a proper valuation on your business. Security companies often have a significant amount of recurring monthly revenue which is valued more highly than regular installation or service revenue. Many Chartered Business Valuators undervalue RMR.
Be realistic about your expected purchase price. Most owners over-value their businesses. Small businesses are generally valued anywhere from three to five times their annual earnings. To get multiples in the six to eight times earnings, you have to be a $10-$20 million dollar company in terms of revenue with good margins and an attractive growth rate.
If you have all these pieces in place then you have the basics. From here, it is important to prepare yourself for the process.
Selling a business takes time — longer than you think. I don’t think I have sold even the simplest of businesses in under four months. Several businesses have taken me 18 months to sell. Whether you are selling the business on your own or using the broker, think about spending well over 100 hours on the deal. I have spent more than 200 hours on many deals.
On balance, I suggest to owners of fire, guard and integration businesses that they should allow nine months to complete a sale. A sale of monitored accounts can be less.
Prepare yourself for bumps along the way. A buyer may not like something about your business or will want to dig into some aspect of it that will seem irrational to you at the time. Or your first sorties into the market may turn up lousy offers.
Some buyers will turn out to be tire kickers who are not seriously interested in buying at a fair price but rather looking for a big bargain. A good broker can spot them a mile away. You will need resilience to get to the finish line along with a good deal of patience.
Finally, don’t expect to get your purchase price paid all up front at the closing, particularly in these days with COVID still around and increased perceived risk to most buyers. Be prepared to take a hold back, an earn-out or some form of seller financing. Selling your company is a process. Prepare yourself in advance by taking the steps mentioned above.
Victor Harding is the principal of Harding Security Services (firstname.lastname@example.org).