The Big Idea with Ron Davis
Don't sell yourself short
Selling your alarm company can be a grueling process fraught with technical and legal difficulties, not to mention psychological ambiguities about whether selling is the right thing to do. Find out what you need to know about assembling a seasoned and professional team to guide you through a profitable transaction.
Whenever independent alarm company owners get together, whether in small groups or large, invariably the question comes up: “Does anyone know what are the multiples?” Or, “Does anyone know if this is a good time to sell?” These questions and more are ubiquitous wherever and whenever alarm dealers gather at a seminar or talk.
Anyone who’s ever engaged in an acquisition or divestiture knows what it’s like to buy and sell. The turmoil and lack of knowledge on both sides of a transaction can cause what seems to be a “paralysis by analysis.”
The accumulated wisdom generated by these transactions can provide today’s seller with the right knowledge to better evaluate the opportunities that are there. It can also help an owner fully understand the questions that should be answered before a decision is made.
The following represents an overview checklist that alarm dealers refer to when getting ready to make a decision about selling their company. It is by no means complete, but it does cover all the bases that require consideration.
Be Sure That Selling Is the Right Thing to Do
The first step is to examine why you are selling. Think about it. Ask yourself what will happen if you do sell, or conversely, if you don’t sell. Are you considering selling only because something caused you to become momentarily frustrated? Is this the best time in your business career to sell, i.e. are you on an upcycle or a downcycle? Most importantly, if you did decide to sell, how would you feel deep down inside once the transaction was complete?
Next, consider whether your business is really ready to sell. Look at your company through the eyes of a potential buyer. It’s not unlike getting ready to sell a house, boat or car. After all, you want any of these items to look their best to make sure a buyer is in fact going to get what he or she is looking for.
Take Great Care in Assembling Your Transaction Team
Now it is time to assemble your transaction team. Think of the term “all stars” when selecting the members of your team — you only want the best. The members of your team should include the business “broker” (who is usually not a broker in the legal sense, but rather a “finder”) who is primarily concerned with the process of bringing you together with a potential buyer.
Once you’ve found the buyer and the outline of a deal is put together, the next most important member of your “dream team” is the lawyer. And it is here when most sellers make their biggest mistake. They go to their family practitioner who has helped them with everything from incorporation to unemployment compensation, disputes, traffic tickets, marital disputes and everything else of a legal nature.
However, the only thing that is important in this process is the knowledge of transactional law and, more specifically, transactional law as it applies in the alarm industry. Transactions in the industry are different and truly require specialists who have an understanding of both the process and the application of that process.
This is not to suggest that your own lawyer is not useful. Very frequently the industry lawyer and your own corporate attorney will work together to protect you during and after the process is completed.
The financial guy, accountant, financial planner, CPA, or whatever you call him or her is the next player on your “dream team.” He or she will help you to structure a transaction in the most advantageous way so as to minimize, legally, the consequences of any taxes that may be due as a result of selling your company.
Taxation percentages can go as high as 55 percent of the proceeds of a transaction. When you couple that with the standard holdback and other charge backs, such as deferred revenue, it can mean very little money in your pocket.
The “financial guy” can help not only structure the deal to minimize the impact of taxes, but also help you plan for the future in a way that will allow you to accomplish your financial goals (and in case you don’t have those financial goals clearly identified, the financial planner can help you lay them out).
The final member of your “dream team” is the administrator, the person who makes sure that all of the files are in order, the financials are up to date, the office looks right and is ready for due diligence (more about that later). This must be someone who you will take into your confidence about the proposed sale to help you accomplish your mission in as quiet and expeditious a manner as possible.
Send Your Team to Find a Buyer and Initiate the Sale
At this point, the seller and his or her team can start the process of determining the best way to structure a transaction. Will it be a stock sale (sometimes difficult to do), or an asset sale (more common and certainly the preferred method by most buyers)? The lawyer should be notified that the process is beginning and to be prepared for questions that may come up about the letter of intent (LOI).
The finder or broker goes out and finds a potential buyer, negotiates an acceptable price, and agrees upon the general terms of a LOI. The agreed upon price, in this industry, is usually a multiple of recurring monthly revenue (RMR), and can hide many little “gotchas” that a less-than-knowledgeable advisory team might not pick up.
Get Up to Speed on Multiples, Where 40X RMR Now Not Unusual
The multiple is then agreed upon and the LOI is prepared. This brings up a whole discussion on what kinds of multiples are being paid in the alarm industry today. Since many transactions are confidential, the data in this area is rather unscientific and can only be estimated from known transaction figures and conversations throughout the industry.
The most important fact is that multiples are high, perhaps higher than they’ve been in years. Transactions are taking place where the multiples are in the 40X range for companies that have at least $50,000 a month RMR. This number may conflict with other reports that suggest multiples are considerably lower. However, there are documented deals where the numbers are for the most part in the upper 30s minimum, 40 on average and north of 40 on occasion.
The variables may include the quality of the accounts, the number of the accounts, the location of the company and the accounts, and the “hair” on the transaction, i.e. lack of contracts, lack of owned telephone lines, etc.
Once the LOI has been accepted, the lawyer takes over and negotiates the terms and conditions of the transaction with the other side. Simultaneously taking place is another thing known as due diligence. This is the time and the process that permits a due diligence team to come in and review all aspects of the business.
Of particular interest are the customer files that should include the entire history of each account that is monitored in the company, along with current contracts, right of rescission forms and any other pertinent information that might exist.
Formulating a Contract and Closing the Deal
The parties then review and agree upon the contracts and set a date for the closing. Contracts are prepared, final reviews are made by the legal teams on both sides, the financial advisor is brought in to make sure the terms and conditions are such that it will allow the seller to gain maximum tax benefits, and the final small points are negotiated and agreed upon.
The closing is a momentous time for the seller because it represents the culmination of his or her life’s work. It’s the time where money is transferred to the seller’s account (usually done invisibly by the buyer on behalf of the seller) and is also the time of a potentially big letdown. You need to be aware of this.
At the end of the closing, the lawyers shake hands, the accountants shake hands and the buyer and seller shake hands. Everyone packs up their bags, smiles at everyone else and leaves the office (which is usually the attorney’s office). The buyer starts running the business and assimilating everything he or she has to, and the seller goes off to celebrate. Deep down, however, the seller wonders, “Is that all there is?” and almost always suffers disappointment.
This is natural and is to be expected. You’ve been building up to this for such a long time, and it’s difficult to let it all go, seemingly at once.
Why Worry? It’s Time to Learn to Love Retirement!
With all the i’s dotted and t’s crossed, the seller goes off and enjoys the rest of his or her life! After the brief moment of disappointment or what is known as seller’s remorse, the seller almost always recovers (usually when the bank has confirmed that the money is actually there) and restarts in his mind’s eye the plans envisioned when the transaction was initiated. And that’s usually when the seller’s fun begins.
That is the process that takes you from beginning to end, in less than the few minutes it took you to read this article. In the real world, it generally takes three to four months. The process may vary slightly, but generally speaking this is the way it all goes down.
If there is a lesson here to be learned in this whole process, it is: DO YOUR HOMEWORK. Don’t just make a few phone calls. Be sure that there is a real due diligence on the part of all your team members. Once you know the members of your team really are “A players,” 90 percent of the battle is over.