Is now a good time to sell your security business?
The pandemic has the economy in a tailspin, so know what you might be getting yourself into
By Victor Harding
Conventional wisdom might tell us that with COVID-19 still very much hanging around and the economy shattered by the shutdown, now might not be a good time to sell your security business.
If I were an owner of a profitable security business that wanted to sell, I would certainly be concerned. But, amazingly enough, there are several forces at work that suggest that now could actually be a good time to sell your business.
But first we should review what I think are some basic requirements that every seller should have in place before even considering the effect of the virus. First, it has to be the right time for you personally to sell. You need to be emotionally ready. From my experience, most owners know when it is time.
Secondly, when selling any business, you should have at least two years (three would be even better) of good financial results behind you and a decent forecast for the next 12 months.
This is paramount. If the virus has put a dent in your immediate results, then it is up to you to show buyers that whatever revenue you may have lost will be picked in future months and that your business has not been permanently damaged.
In earlier articles, I talked about the new variable which is being factored into all new valuations using a calculation of normalized EBITDA.
They call this new variable EBITDAC where the C is for the effect of COVID-19.
Third, you need to have a realistic idea of what your business is worth. That probably means getting your business valued fairly close to when you put it on the market.
If all three of these issues are a go, then I think you are in a position to consider a sale, despite COVID-19. Next, you should be able to explain clearly the effect of the COVID-19 shut down on your business. It may be nothing, a little or a lot. If it has seriously damaged your financial results for the current year, then perhaps it is better to wait for a year or so until you have a good year’s results under your belt.
But if you own an alarm company where your attrition has not been affected too much or a guard company where your business actually improved or at least held its own, you can proceed towards a sale without fear of being devalued by the times we are in. I am currently selling several alarm companies.
If you have reached this point and everything still looks good, there are some forces working in your favour if you want to sell your business.
Firstly, because the virus has scared some sellers off, there may not be very many other businesses in your market for sale. That helps you.
To get a feel for what’s going on in the market, I suggest you talk to some other industry players or even a broker who works in your field.
Secondly, and I have mentioned this in earlier articles, some companies are buying now because their “organic” growth has dried up. They need to replace new organic accounts with acquisition accounts.
Many alarm companies still can’t get into homes to install new systems. Regarding commercial security installations, many companies have been affected badly by the virus and are simply not spending money upgrading their security systems.
Thirdly, private equity, which is proving to be a much bigger factor in security industry deals these days, has lots of “dry powder” (un-deployed capital) looking to be invested. They don’t appear to be slowing up on their pursuit of deals. They, along with anyone else who is doing deals, are finding ways to work around the virus.
As for the regular bigger buyers in the alarm market, they seem to be carrying on trying to do deals almost as if there had been no virus shutdown. This is partly due to the fact that alarm monitoring RMR does not appear to have been too affected by the virus. In fact, it has been surprising to me how many buyers I have talked to in the various segments of the security industry that are considering these times as “business as normal.”
Then there are the opportunistic buyers. So far I have seen two kinds: those that are attempting to take advantage of the times to get some “deals” on businesses for sale and those that are buying because they want to get the jump on their competition.
So put all this together and my point is that if you can get past the three basic hurdles, the M&A market for security companies appears to be almost as active as ever.