Steve Rubin weighs in on several subjects that can help you maximize profits and minimize misery when you sell your Alarm or Integration company. Steve brings nearly 30 years of successful negotiations for dozens of companies. To coin an old advertsiing phrase, when Steve talks, people listen.
We’ve seen it in over 20-plus years representing sellers ready to cash in and reap the rewards of many years of building a security business. We’ve seen tears of joy and, unfortunately, sorrow. We’ve seen break-ups of partnerships and marriages. We’ve happily been involved in many celebration dinners after successful sales.
After all these years and hundreds of successful transactions representing sellers, we have one huge statement of advice — Be careful as you are growing. Build your company today in order to sell for the maximum dollars possible when you decide to exit.
There are many factors to ensure the above. Here are some of the greatest hits:
- Are you a “C” Corporation? If yes, consult an industry attorney. This is one big reason we’ve seen business owners very unhappy when they decide it’s time to sell.
- Build your RMR with good legal contracts. Ken Kirschenbaum’s firm is the gold standard. "No contract" potentially equals "no value."
- If you’re building an integration business, profitability is of utmost importance.
- Product lines should be well known and respected names. No offshoot brands,
- All monitored accounts should be on phone lines you own, making for an easy transfer if a buyer wants to move them from one Central Station to another.
- If you've just put on a new account, don’t lose it. Attrition percentage for the year needs to be below ten percent. Banks (who loan money to buyers for purchasing) like to see low lost account rates. Anything over ten percent is suspect.
- Make sure you have a diverse customer list. A twenty percent or more concentration with one customer could create issues with a potential buyer.
There are many more “do’s and don’t’s.” All of these and more are discussed when we represent a seller. We make the best of whatever situation our client is in. Make all the right decisions now so when you come to us, we will be able to make your selling experience a happy one.
Best of luck and give us a call to plan ahead for that celbration dinner!
— Steve Rubin
Davis Mergers and Acquisitions Group (DMAG) has represented many sellers who are more integrators than RMR companies. When a dealer interested in selling signs our Agreement, we analyze and evaluate their business to decide how we will go to market to achieve maximum dollars for our client.
Will yours be an RMR or an EBITDA sale?
First, we must establish whether our client is better off with an RMR or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) sale. If you’re an integrator, usually, marketing based on your EBITDA value will turn out best.
When calculating EBITDA, we start with your Net Income for the latest year end or trailing twelve months. We find many Net Incomes to be low or even negative. The lower the Net Income, the less payment to the IRS.
Second, enter Adjusted EBITDA. It’s a calculation that takes a company’s earnings (Net Income) and add-backs, interest expenses, taxes, and depreciation charges, plus other one-time expenses in your P&L’s that won’t be incurred once a new buyer owns the company. We look at every expense line item to determine if it could be considered an add-back. We may ask for help from your accountant or one of the accounting experts in our industry.
Some no brainer examples
- if the seller is paying for their car, boat and/or plane through the business and it is in the P&Ls, these would be considered adjustments and added to the Net Income.
- Employees who are currently employed but won’t be at the time of sale and needn’t be replaced, their entire compensation package would be added to Net Income.
- Ex-employees, who left employment during the year and weren’t replaced, would be treated the same.
- If an owner is earning $300,000/yr. and he or she is leaving after the sale and is not replaced, that’s all good for additions to the bottom line.
- If the owner is replaced by someone who will earn $200,000, then only $100,000 drops to the bottom line.
Where you must be careful is in knowing the difference between legitimate adjustments and synergies —. where a buyer feels certain expense items are not considered adjustments. An example could be closing the seller’s office and moving everything to the buyer’s office. The seller feels all that cost savings should be an adjustment. The buyer does not because they’ll have added costs.
EBITDA multiples, and cautions
Once we’ve decided on the actual adjusted EBITDA number, the multiples being used today are somewhere between four and seven times. The difference will be how much the buyer wants to own the seller’s business.
Caution — an EBITDA sale means everything included unlike an RMR sale where once the RMR multiple is established, items such as inventory, vehicles and other assets may be added to the final sale price.
Once we have the calculations for both RMR and EBITDA, we’ll discuss the benefits of going to market the way we think is best. In a few cases we may be able to incorporate both in our marketing efforts.
Show us what you’ve got. Let us analyze and come back to you with our valuation. Then you decide if now is the right time to sell.
— Steve Rubin
Steve Rubin looks at how Contracted accounts and services can put extra money in your pocket when you decide to sell.
Monitoring — This a no brainer. Charge a fair price. If your basic monitoring costs are $5, you should be charging in the $25-$30 range. This is the most profitable component of your RMR potentials. Your goal is to come close to the same percentage profitability with other RMR potentials. Why? Because some day you may want to sell your company. When potential buyers look at your Contracted RMR, they generally will pay a higher multiple for high margin RMR. If margins on certain RMR are 30-40%, they may offer you considerably less than 70-80% margins on your basic monitoring.
Maintenance/Service — Always try to get this Contracted. Any monitored subscriber, especially commercial, will include a service component. Instead of charging time and material, create more value by making this Contracted RMR as well. Use a Subscriber Agreement (Kirschenbaum Contracts) that has either a check box for this service along with charges associated, or one that is a standalone Service Maintenance Agreement.
Fire Test and Inspect (FT&I) — We work with so many companies that only charge time and material for the once-a-year test. This is not worth anything to a potential buyer. If you can get this subscriber to sign your agreement, you’ve just created value. Example: a $240/yr. FT&I subscriber at Time and Material = $0 to a potential buyer. A Contracted FT&I subscriber at $240/yr. = $400-$700 to a potential buyer.
Remote Systems Management — Access Control and Video Cloud Hosting Services — Another great opportunity for Contracted RMR.
Medical Alert (PERS) —This Contracted RMR is generally not valued as high as commercial or residential monitoring because the length of term is less. If contracted, it could be worth the same as any of the above. Something is better than nothing.
But wait, there's more
Banks rule here. No Contracts mean no money for the buyer, hence no money for the seller. Don’t let this be you. We see it all too often. Whether you are mainly an RMR company or an Integrator, your financial bottom line will be a lot healthier with Contracted RMR.
1,000 subscribers, $30/month ea., with no contracts = $0
1,000 subscribers, $30/month ea., with good legal contracts = $1,110,000 (figured at 37X)
— Steve Rubin
One of the items I mentioned in my last article was attrition — losing subscribers. Behind Contracts, it’s the most important barometer to potential buyers of how your company is run. Whether you're selling or not, you should have a program in place which flags any potential subscriber cancellation. Each one is paramount and needs special attention. As you well know, it costs a lot of time and money to sign up and maintain a subscriber.
In fact, whenever you do decide to sell, a buyer will require an attrition report for the past one to two years. This is part of the valuation used to determine how you're handling attrition. Do you have an ongoing retention program or not? Here are a few ideas you could use to save your customer:
- Call the customer — why are you thinking of cancelling or why did you cancel? Ask them to be specific. Address their issue with a positive statement. Don’t argue. Apologize and suggest a solution. Remember the adage, “the customer is always right.” Hopefully your call will catch them so off guard that they’ll be okay once the issue is resolved. In some cases, you may have to give a credit towards the monitoring fee. It will be well worth it.
- If your subscriber is moving, make sure you find out where and when. Also, find out who is moving into the old address. You could have a win-win situation between an old subscriber and a potential new one.
- PLEASE make sure your software program records the change properly. You don’t want something like this picked up as a lost/attrited account. If it is, your attrition percentage will go up incorrectly.
The average attrition rate in our industry is 10%. That includes lost accounts only or gross attrition. It’s not the difference between adds and deletes.
What’s your company's attrition look like? For further discussion on this or other important seller/buyer issues, feel free to contact me or any of the Davis Mergers & Acquisition Group at the numbers listed below.
— Steve Rubin
The Davis Group can help you understand these and other concepts better and help you to develop a longer-term transition strategy to position your company for maximum value in today’s market.