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Selling a business in slow times

Selling a business can be a time consuming, gruelling process during the best of times. Throw a financial credit crunch and global economic crisis into the equation and it's not a surprise that most security business owners are opting to delay putting up the 'for sale' sign for at least a few more years.



March 30, 2009
By Vanessa Chris

Topics

While most financial experts recommend this line of action given the
uncertainty of the current market, not everyone has that luxury. The
good news is that there are still buyers out there — and they’re
willing to pay good money for businesses that meet their needs.

Reliance Protectron Security Services, for example, has relied on
acquisitions to fuel its growth strategy since it was established in
1989, and it doesn’t intend to let a little economic downturn impede
its growth. Because it is owned by investors who had the foresight to
save for a rainy day, the company has money to spend — but it’s
determined to spend it wisely.

"In this market we’re looking for synergies," says Scott Adamson,
director of dealers and acquisitions in Canada. "We want to be
strategic in our approach, so we’re looking for companies that give us
a presence in a market where we currently don’t have one, or a company
that provides some level of expertise or market niche that is
complementary to our own strategic initiatives."  

Reliance Protectron isn’t alone in its demands. While there are
opportunities out there right now, sellers are going to have to do a
lot more to make their businesses attractive to potential buyers.  With
financing at a premium, many buyers are being forced to pay much more
for it than they did two years ago. In many cases, interest rates have
more than doubled — jumping from around 7 per cent to over 14 per cent.

In addition, more buyers are being forced to put in their own capital
when purchasing a business, because banks aren’t willing to lend as
much as they once did.

"There are two components to financing a business purchase. The first
is the purchase price and the second is financing the working capital,"
says Rhonda Downey, president of Regelle Partners, a mergers and
acquisitions firm that specializes in the security industry. "Having a
bank fund both types of financing today is rare, so the buyer needs to
have their own finances available. A seller can help in the financing
by taking back paper for a portion of the purchase price."




What buyers want

With the extra costs involved, investors are looking for the ‘sure
bets’. They want established businesses with strong cash flow, future
business growth prospects and very low customer turnover.

Protectron is looking for companies that have high quality accounts
that include well-installed equipment, preferably of the same brand
name. A good mix of residential and commercial accounts is also
preferable, with residential accounts exceeding commercial  by a ratio
of 4 to 1.

"Commercial accounts have high attrition and higher service costs,"
Adamson says. "If a business has a fairly uniform base, with most
systems coming from the same manufacturer, that’s easier for us to take
over."

In fact, anything that will assist in a smooth transition is seen as a
benefit in Protectron’s books. The more of a business’s accounts that
are on preauthorized payments, have strong payment histories and have
signed contracts, the more Protectron is willing to pay.

If the seller has a third party monitoring station monitoring its
accounts, Protectron will pay more for a dedicated 1-800 number rather
than a number that is shared. A dedicated number, reserved strictly for
the seller’s clients, is much easier to switch over. Shared numbers
require the buyer to reprogram every individual alarm panel with a new
phone number, which can be very time consuming.

In general, anything you can do to secure the future earnings of your
company, and make a transition simple and painless, will ultimately
increase your company’s dollar value.

"The goal for every buyer is to maximize cash flow and minimize risk,"
says Marwan Jomha, director, Specialist Advisory Services at Grant
Thornton. "If you have long term contracts in place, that’s attractive.
If you can reduce your economic reliance on your customers and
suppliers, that’s good too. Having twenty customers is better than
having one, in the eyes of the buyer, because if that once customer
leaves all the income is gone. The same thing goes for suppliers."



Asking for help

Not only is it difficult to uncover all the little details that might
be in demand by current buyers, but it’s also difficult to determine
whether your company’s offerings are what buyers are looking for.

That’s why many companies employ the services of merger and acquisition
firms such as Regelle, to ensure they get the best price for their
company. These firms take the burden of selling a company off the
seller’s hands by handling such tasks as the preparation of
confidential business profiles and confidentiality agreements and
dealing with potential buyers.

"Independent business owners who sell their company on their own are at
a big disadvantage against the experienced buyers who have entire
acquisition teams," says Downey, a Chartered Accountant who once worked
as part of a large acquisition team. "These lawyers, Chartered
Accountants and MBAs are very experienced at acquisitions and getting
the best deal for their company, not the seller. Our goal is to level
the playing field and get the seller the best price and terms for their
company — and it’s working."

Companies such as BDO Dunwoody also offer services for companies that
are valued between $500,000 and $10 million. BDO offers a free
assessment to determine what the company is worth, and what can be done
to increase its value.

"When someone is thinking about getting their business ready to sell,
we typically suggest they clean up their financial statements, firm up
their clients, and determine what the value proposition of the business
is, as well as what can be done to increase its value," says Priti
Mehta, senior vice president of transaction advisory services for BDO
Dunwoody.

Often, after looking at these factors, an acquisition company will be
able to give you an estimate of what your company is worth. In this
economic climate, that number isn’t always what people are looking for.

"There’s a huge disconnect right now between buyer and seller. The
prices are just really different from what each party is expecting,"
says Jomha from Grant Thornton. "People who are buying are looking for
bargains, and people who are selling often think their business is
worth the same as it was two years ago, and that’s just not the case."



Preparing your business for sale

1.  Make sure you have your financial records in order and good
accounting and information systems in place. The more information that
is readily available, the quicker a potential buyer can determine if
your business is, in fact, what they’re looking for.

2. Ensure your management team is as strong as possible. In this
economic climate, more buyers will be coming from outside of the
industry. A strong management team that knows the ins and outs of the
business — and can fuel the company’s growth after you leave — is a
coveted commodity.  Many buyers will also require you to stay on for a
couple of years, to ensure the transition runs smoothly and all the
customers don’t leave with you.

3. Recognize that selling a business doesn’t happen overnight. In some
cases, it can take 6 to 18 months — or not close at all. Despite the
amount of "sweat equity" you’ve put into your business over the years,
buyers are going to be looking at what’s worth on paper.


Is now the time to sell?


That inevitably depends on the demand for your type of business in the
marketplace, as well your personal life stage. If you’re ready to
retire — or if your company serves a coveted niche — now might still
be a good time to sell.

Adamson of Protectron says if you’re going to sell, the earlier you
sell the better. Like a car, an account base depreciates over time. If
you have a 10 per cent customer attrition rate, then you’re losing 10 per cent of the
value of your recurring revenue every year. By selling earlier rather
than later, you preserve the value in your accounts and free up capital
that you can use to buy undervalued stocks, GICs or real estate right
now.

While purchasers are willing to pay less right now, and many sellers
are tempted to ride out the storm and wait for the market to improve,
Adamson says that this could pose problems.

"Two years from now, while you might receive a higher purchase
multiple, you will also have 20 per cent fewer customers to sell as a result of
attrition," he says. "If you were to take a simple example of a dealer
with 500 accounts at $25/mo average RMR and a 10 per cent attrition rate and
his choices were to sell today at a 28 multiple or wait two years and
sell at a 32 multiple, he would make $16,000 more selling today."

At this rate, a company would have to sell eight systems a month to
maintain the level of the existing base — a number Adamson says is a
lofty goal.

While not everyone agrees with this logic — Priti of BDO Dunwoody, for
example, isn’t urging anyone to ‘sell now’, stating that the market is
so uncertain it’s difficult to tell what’s going to happen next —
Adamson says sellers still have the opportunity to stay on and stagger
the sale of the company.

"We’re always looking for new dealers, so it’s not like the owner would
now be out of work," he says. "For that matter, he could stay in
business as a dealer, cut his operating costs substantially (we would
do billing, service and monitoring) and make more money than ever
selling his accounts to us one at a time."


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