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Friendly reminders

In going about my business recently, I have been reminded about certain do’s and don’ts regarding selling your security business that perhaps needs saying again.

The need for signed monitoring contracts

The last three deals I have been shown were from dealers who had no signed monitoring contracts with their customers. Interestingly, each dealer gave me the same reason why they didn’t have contracts: they did not want to hold onto their customers by the force of a contract. If the customer wanted to leave, they should be allowed to leave. Although contracting your customer for a period of time is not such a bad idea, this is not the reason why most buyers look for a signed contract. Informed buyers, first and foremost, are looking for the Limitation of Liability clause. This clause is usually on the back of the contract in fine print, but, because of its importance, in bold type. The clause limits the liability of the owner of the contract to a certain amount if the owner of the contract should be sued. While the initial owner of the contract may not have significant assets at risk most of the bigger buyers do and consider themselves targets. So at the very least, most buyers want to see that Limitation of Liability clause. Very important.

There are other clauses that are also important in a monitoring contract. A good contract will also have a clause relating to assignability, automatic renewal, indemnification clause and an exculpatory clause.

I want to see the whole company, not just my accounts

I hear this statement quite often from owners, usually of small alarm companies. These same owners have been called over the years by buyers asking if the owner was interested in selling their monitored accounts. At the time they were not. So now that they are ready to sell they want to sell “the whole company”. I have found that this can mean a number of things:

It can mean they want to sell the shares of their company to take advantage of their one time capital gain exemption. Selling the shares may in fact be possible particularly when talking to smaller buyers. However the bigger buyers do not like to buy shares for a number of reasons and many times the bigger buyers pay the best prices. If you have an alarm company with less than 500 accounts it is going to be quite difficult to sell the shares unless it is to a smaller buyer.

Many times “selling the whole company” infers the owner thinks there is more value in his company than just the monitored accounts and he wants to get that extra value.  (We are not referring to hard assets like inventory and vehicles which can be sold as extras in a deal but are not usually.)The inference here is that the company’s installation and service revenue is the something extra that is worth something. The problem is, most of the time if you remove the monitoring revenue and costs out of most alarm companies income statement and adjust the income statement for a the full costs of a person to run the company, the company is not making money. Buyers are not going to attribute value to something not making money.

Selling shares is even more attractive than it used to be

Having just said that it is difficult to sell the shares of your company if you are a small alarm company (less than 500 accounts) let me turn that around and say that selling the shares of your company these days is even more beneficial compared to assets than it used to be. This is primarily because of the one- time capital gains exemption for the sale of shares of a Privately Controlled Canadian Corporation (PCCC) — a stipulation which thankfully our tax crazy federal government did not touch — but also because the tax act was changed effective Jan .1, 2017 such that owners could no longer get 50 per cent of the purchase price relating to the sale of goodwill (i.e. monitored accounts) tax free into their own hands. It is more complicated than I have laid out here but the result is still the same. Selling “assets” became less attractive after Jan 1.

Trying to go it alone

I have made this point before but from a different angle. There are several reasons why using an intermediary or broker when you sell can help you but one reason is not talked about enough and that is just getting the deal done. Over the last three years, two large Canadian alarm companies have put themselves up for sale. Neither chose to use a broker who knows the Canadian alarm market. Guess what? Both companies are still for sale.

Victor Harding is the principal of Harding Security Services (victor@hardingsecurity.ca).

This story appeared in the November/December 2018 issue of SP&T Magazine.