Lessons learned: Who should help you sell your company?
By Victor Harding
In the past, some owners have sold their security companies without using a broker or intermediary.
Partly this is because, up until recently, there were no brokers in the market to help. Secondly, if their company was small and made up of monitored accounts, it simply did not pay to use a broker. But as the size of your company grows, there are good reasons why you should get professional help.
Most owners don’t have a good idea of what their company is worth, even if monitored accounts make up most of the value. Nor do most owners know much about the process of selling or who the good buyers might be. To add to this, it is tough to run your company and sell it at the same time and equally tough to keep the fact you are selling confidential if you are conducting the sales process yourself. Finally, as the size and the complexity of your company grow, the stats show that a good broker can make a significant difference in the price you will get. They can also improve your chances of getting a deal closed more quickly.
I have owned and run a brokerage firm catering to security businesses for 10 years. A broker or intermediary is the term used to sell smaller companies. That would include businesses up to $15 million in annual revenue. Most brokers get the majority of their fees from the success fee (approximately five per cent) when the business is sold. Companies with revenues above $25 million generally hire investment bankers to help them sell. Investment bankers usually charge retainers along with a success fee.
What skill or experience should this owner be looking for in a broker? First and foremost, how much experience and success has the broker had in selling companies? What is their success ratio in getting deals closed? What references can they give you? Does the broker have any experience in selling companies in your industry? This is preferable but not mandatory.
Knowing what I know now about being a broker, I would also make sure that the broker does not have such a narrow focus on his or her business that he or she is always going back to the same old industry buyers. To get the best price for a business requires a wide search of the market with several different types of buyers: industry players (strategic buyers), non-industry players (industries aligned with the particular industry the owner’s business is in) and financial buyers such as private equity firms.
As professionally trained as your lawyer and your accountant might be, they are not the people to help you sell your business. You will probably need both of them at some time to complete a deal but they do not usually have the skill sets to actually do a valuation or sell your business. A typical accountant has skills close to what you are looking for but still there is a difference. Creating an enticing selling package for your company which identifies strengths and weaknesses and opportunities for the future is about more than just the numbers.
Also selling small companies (less than $2 million in revenue) and dealing with their owners can be quite different than owners of five to 10 million dollar companies. Ironically, larger companies are often easier to sell. The multiples of earnings are higher, and the business tends to have more systems in place and is less dependent on the owner. If I had a company earning $2 million or less I would look for a broker that had experience selling that sized company.
It is also wise to be wary of general business brokers. They don’t tend to have much in depth industry experience. Some of these general brokers have large marketing reach, which certainly can be useful. Still, it pays to test these brokers out on basic issues such as what they think your business is worth and the buyers they plan to approach. The answers to these questions can tell you a lot. For example, it is not unusual for those unfamiliar with the unique value of monitoring recurring monthly revenue to undervalue it significantly. Also, general business brokers can have fee schedules that are higher than those focused on the security industry.
Finally, owners need to be careful with any broker they hire of what we call the broker’s “tail.” This is the period after the brokerage agreement has been terminated that the broker gets protection on their fees if the business should be sold to a candidate approached while the agreement was in place. The tail should never be any longer than two years (less is better) and it should only apply to buyers where there has been serious conversations had about buying the business that go beyond just signing an NDA and getting the selling package.
Hiring a broker to help you sell your business can help get you a better price and get the deal done more efficiently, but you need to do your due diligence first.
Victor Harding is the principal of Harding Security Services (email@example.com).