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Top 10 factors that drive price when selling a business

There are several factors that work together to determine what price you will get when you sell your business. Let me list what I think are the most important:

1. Size of your business

The fact is that size counts. For example, 5,000 alarm accounts will most likely fetch a larger multiple of recurring monthly revenue (RMR) or higher price than 1,000 accounts. A $10 million dollar fire or integration company will attract higher multiples of earnings than a $2-3 million dollar company. The same is true to some degree with publicly traded companies.

2. Cash flow

When figuring out what to pay for a company, a buyer is going to want to determine the cash that the company will throw off. The cash flow from a company is not always obvious, even to the seller. Larger cash flow is part of the reason why larger businesses sell for more. It is also why buyers of alarm accounts generally pay more for higher priced accounts and why they pay attention to attrition on an account base. Account bases with higher attrition produce less cash flow in the end. As a seller, try to calculate what the annual cash flow is from your business.

3. How much RMR you have

RMR as revenue in any market is generally worth more than one-time installation or service revenue. RMR reduces risk for the buyer because by definition it recurs month in and month out. This is why monitored accounts are worth so much and why integrators are always encouraged to try to get maintenance contracts (another form of RMR) on everything they sell.

4. Do you have something proprietary?

Warren Buffett always talked about whether a business has a “moat” around it — something that other businesses have difficulty duplicating. If you don’t have one, try to create one. Become the go-to company in some part of the security industry. Proprietary businesses will, most of the time, be more valuable.

5. Little or no concentration of revenue

This is again all about risk to the buyer. That is why buyers will ask an alarm company whether they have multi-site accounts or ask an integration business whether any one customer accounts for more than 10 per cent of total revenue. They want to know about risk.

6. Good management team in place

Businesses that depend on their owners for too much are almost always riskier businesses to buy and therefore less valuable than those that do not — unless the owners are going to stay in place. Having a good management team that can run the business without too much input from owners is always a good thing.

7. Is there a solid pattern of growth in revenue?

Companies showing significant growth in their revenue over the previous three years will almost always sell for more. If you can’t get growth in your alarm account base, then try to get it in either the installation or service part of your business.

8. Canvass the market extensively when you sell

This is more important than many owners realize. I have seen brokers or investment bankers on certain deals contact 100 potential buyers. It’s tough to do that in Canada where the market is smaller but the principle stills stands. If you or your broker don’t solicit buyers widely, it is very unlikely you will get the best possible price. This has happened to me before. When contacting someone I did not think would be that interested in a business, I sometimes find that they are actually interested and make a very good offer.

9. General economic conditions when you sell

This can be a factor in deals, although I maintain good companies can sell almost anytime. This is not such an important factor with the security industry because companies have recurring monthly revenue. All else being equal, it pays to sell in better economic times. Valuations are generally higher and banks are lending more easily.

10. The industry you are in

The fact is that some industries are more attractive than others at certain points in time. Also, whole industries come and go. The good news is security is generally considered a good industry to be in and one that recently has shown good growth. Outsiders like private equity like the security industry to invest in.

When I think back over the deals I have been part of, most of these 10 factors have figured in all of them. If you are thinking of selling, this is a good list to go through to see how many boxes your business ticks.
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Victor Harding is the principal of Harding Security Services (victor@hardingsecurity.ca).