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How to get the most when selling your business

Greg Taylor knows exactly what that’s like. Today, Taylor is an
investment advisor with TD Waterhouse in Mississauga, Ont. But 10 years ago
he was immersed in the details of evaluating customer accounts and
arriving at the true value of his company so he could get the most from
a buyer. So with one foot in a new career and the other still firmly
locked in the company he had poured so much into, he started picking
his way through the prickly path of selling an alarm business.

“I had always been interested in the financial markets but because
like most alarm dealers I was totally absorbed in running my business,
I didn’t participate in it much. When I started to have capital I was
plowing everything back into my business. But slowly I started getting
interested in trading the last few years I was running my business,”
says Taylor.

That was 1997 and Taylor felt the timing was right to sell his business
and make the leap to becoming a financial advisor, but he still had
concerns about how best to approach selling his business.

“I had put my heart and soul into building this business and I
discovered that at no point can you compromise yourself – this is your
baby and you want to make sure everything is handed off well and you
hope they care about those clients as much as you did,” says Taylor.

When he started getting interested in the financial markets Taylor
decided he wanted to change careers and he sold his company, Taylor
Security, to Voxcom. He had been in the industry for 15 years, working
for another firm for five years before starting his own company. He was
34 years old at the time and while relatively young, had focused on
developing a business that made customer service a priority. He was
proud of what he had built and not only wanted top dollar for his
company, but wanted to make sure his clients would be taken care of as
well.

The process of selling his company became an intensive learning
experience. Even though he obtained the services of a lawyer to go over
the 200+ page contract with him, Taylor says the lawyer didn’t know the
ins and outs of the security business and so he had to be the expert.

Taylor’s alarm company was modest in size, about 15 employees and just shy of 2,000 accounts (50/50 commercial/residential).

“The timing was excellent because I sold at the top of the market,”
says Taylor who had watched the industry go through its highs and lows.
“I had known when I first got into the industry what the multiples used
to be like and they kind of went a lot lower during the recession.
Around the time I started considering it the multiples were really
high.”

Typically, in a good market, a buyer would pay $750 to $1,000 for a
client paying $25 a month based on the fact the client has a signed
contract with the company.

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Even before he decided to sell, Taylor had received an offer from
another firm a year before. They had heard about his company
and asked him if he was interested in talking to them. “I said, ‘Not
really.’ I hadn’t thought about it, but we ended up sitting down. We
got into some protracted discussions and I learned all the issues
around it such as not only what are they going to pay but how are they
going to pay you? How much is the risk being borne by me and how much
by them? Who is going to service those accounts after? How is attrition
going to be dealt with? How do they value the company?”

Taylor’s experience with the first firm showed him how complicated the
process can be. “They not only looked at recurring monthly revenue and
your attrition but the percentage of commercial/residential and what
your service call ratio was.”

His company had a good service call ratio and had maintained good
records on that side of the business so that didn’t concern him, but it
showed him what a buyer was interested in.

“We could prove we had good quality installations and low service. We
also had one of the lowest false alarm rates. The monitoring centre we
dealt with had 300 dealers and I was the largest and had the lowest
ratio of false alarms and that was because we went to great detail to
deal with that,” says Taylor.

Taylor’s staff would get a fax from the monitoring station every
morning showing the activity for its accounts for the last 24 hours and
then go through the list and see what happened. “If somebody just
tripped the door and there was a “cancel” we would just ignore it but
if there was a dispatch or a zone going off and you think – hey, that
zone went off last week then we’d call the customer. We could
articulate that we had those type of procedures in place.”

In the end, Taylor didn’t sell to the first company due to reasons related to
their conditions on him following the sale, but the next year Voxcom
approached him. Having gone through the preliminary steps with the first company, he knew what to watch for but still had a lot of homework
ahead of him.

“If you’re not savvy and not willing to spend the time and read the
documents and understand the issues you can really handcuff yourself in
a deal,” he says. “We were able to come to terms at the end of the day
with something we were both comfortable with but it was a tremendous
learning experience. If you’re still trying to run your business,
you’ll need some help or you could end up with an inferior agreement or a
huge legal bill,” says Taylor.

In selling an alarm company, Taylor says most dealers fail to do the
due diligence on what their business is worth which involves taking
stock of the number of accounts and the multiple they pay, and also the
goodwill of the business.

If that goodwill is going to bring in a considerable amount of business
over the next 10-20 years what is that worth? Staff and management
personnel also have to be considered — if one key person leaves after
the sale is the company going to survive?

Often a purchasing company will also look at how much of your Recurring
Monthly Revenue comes through pre-authorized payment. The greater the
percentage of pre-authorized payment the more attractive an account
list is because it means less hassle on collection.

“They know if a preauthorized payment is going to hit every month that it makes
a really big difference and drives up the multiples you’re going to get
paid,” says Taylor.

It’s also important to know what your client false alarm rate is. “I
had my clients on one of two programs: Pay monthly as insurance or
pay per dispatch. We had a really low false alarm rate and the
combination of the two things means our police fees are relatively
small. It all goes back to how you manage your business that are the
big factors – they want to know how long it’s going to take to get
their money back.”

Taylor is now advising others on how to approach selling their company.

"I can offer a fresh pair of eyes on their business," he says.

He can be reached at Greg.Taylor@td.com

Do your homework

8 steps to take before selling your business

• Clean up your customer files and know what’s in them.

• Determine what percentage of your accounts are commercial versus residential.

•  Determine how much you want to get out of the deal and then ask if
it’s reasonable: Is that what the market is paying right now?

• What’s your attrition rate? Know your total monthly revenue and growth rate; What do you think the business is worth?

• What are you going to do after the business is sold? If you’re
retiring than it’s an easy decision. If you’re not retiring do you
still want to be in the industry? Keep your options open.

•  From a tax perspective, structure your deal so that you minimize what you have to pay.

• Get a good lawyer, preferably one with knowledge of the security industry.

• Know what your false alarm rate is.