Lessons learned: Maximize the selling price of your business
By Victor Harding
Recently, I listened to a pitch from a well-known company that helps businesses maximize their value when they sell.
Truthfully, I was investigating this topic in regards to my own business Harding Security, but having gone through the process I thought I should pass along some of these tips.
Several of the tips listed below are also mentioned in “Built to Sell,” written by John Warrillow.
1. Buyers are buying the future but paying for the past
This translates into you should not consider selling unless you have two to three years of solid financial performance as shown in your annual financial statements. I have witnessed first-hand with a couple of clients how hard it is to sell a business that has only got one year of really good financial performance. You spend a lot more time convincing buyers that one year represents a trend.
2. Specialize, don’t generalize
Find and develop a niche for your business that is scalable or can be grown substantially. Buyers love companies that have a single focus that they do better than anyone else. Not only do they tend to come with higher margins but the staff are usually that much better. Connected to this is the ability to say no to certain business.
3. Be ready to sell at any time
This even includes family businesses. You never know when an opportunity is going come knocking. It takes discipline and organization to be ready to sell any time. For an alarm company, this means making sure all your accounts are on signed contracts and call forward lines. For all businesses, it means having good financial records and documented procedures.
4. Treat “family” businesses like any other business
Family wealth is sometimes destroyed because business owners treat their children in a special way. Children in family businesses should be prepared to buy shares at the market price, not have them given to them. There needs to be regular meetings and conversations between the majority owner and his or her offspring to assess where both parties are at in their thinking.
5. As the founder and majority shareholder of the business, make yourself as redundant possible
This is tough to do with small businesses. Many owners I have talked to have had bad experiences when they tried to hire a general manager.
If you are still key to the business when you sell, expect to have the buyer want you to stay on board and go through a two-year transition period for the new owners. I find that buyers of integration, guard and fire companies are more concerned about having a planned two-year owner transition than buyers of alarm companies. Alarm accounts appear to be more portable.
6. Try to create a subscription business that generates recurring monthly revenue
All of us in the security industry have heard about the extra value attached to the recurring monthly revenue of monitored accounts. But fire inspection revenue and guard contracts can also have special value, as they are also close to being viewed as RMR as well.
7. Don’t allow any one customer to be more than 10-15 per cent of your overall revenue
This reduces risk for buyers. Private equity firms will look for over reliance on one customer and will raise flags and lower their offers if they find too much emphasis on one customer. It is very easy for a small business to have a single customer responsible for 20 per cent of their annual revenue.
8. Develop a pipeline of good future projects for your buyer to see and be able to capitalize on
Not only does this help convince the buyer that the future market for your product is substantial but it reduces the immediate risk for the buyer once he buys. I have recently had this discussion with an integration business that I am selling. Leave some projects for the buyer to realize later on.
9. Have a three-year business plan drawn up and think big when you do it
There are very few security businesses I have seen that even have a yearly budget let alone a three-year business plan. I say “think big” because often the buyer will have more resources than you have to develop that three-year plan.
10. Find an advisor/intermediary/broker to help you sell your business who has experience in your industry, and make sure you are neither their biggest nor smallest client
I have seen this over and over. General business brokers who are good at marketing sign up clients and don’t know how to value the business or know who it is should be sold to.
11. Make sure your business is marketed to a broad selection of potential buyers
I see this all the time. An owner calls me because they have talked to a particular buyer and now want to sell to this buyer. They just want my help to close the deal. I try to get that owner to assess who else might be interested in his business. On the same note, an owner hires a broker who only shows the business to a single buyer, maybe their favourite buyer. Big mistake. The stats have shown that businesses that are marketed broadly attract higher prices in the end.
These are just some tips to maximize your value when you sell. There are others. The tips above that I think will give an owner of a security business the most “bang for the buck” are 1, 2, 6, 7 and 11. Test your company against these five and see how you do.
Victor Harding is the principal of Harding Security Services (email@example.com).
This story was featured in the August/September 2019 edition of SP&T News magazine.