Best practices for selling alarm companies

Retaining qualified representation can help sellers avoid many common pitfalls
BY Joel Griffin, Assistant Editor, SecurityInfoWatch.com.
07-12-2011

Imagine this scenario. You’ve worked hard over many, many years to build a successful alarm dealer company. A large regional or national firm is looking to expand in the area and wants to acquire your monitoring accounts. You’re finally ready to kick back and enjoy the fruits of your labor, but during negotiations, the buyer notices there is language in some of your contracts that kills the deal.

This is just one of many potential deal-killing scenarios that play out all too often when dealers become involved in negotiations to sell their businesses. To avoid these pitfalls, industry experts say dealers should retain good representation prior to selling their businesses in the form of qualified lawyers, accountants and brokerage firms.

“The first thing a dealer should keep in mind is that the chances are this is the only time in his career that he’s going to be selling his business,” said Ron Davis, president of Davis Mergers and Acquisitions Group. “For most of the buyers out there they’ve (made multiple acquisitions), they’re used to it, they know what to do and they know how to do it.”

Eric Pritchard, a partner at Philadelphia-based commercial law firm Kleinbard Bell & Brecker LLP, says that alarm dealers should run their businesses from the beginning with the expectation that they are going to be selling them, which includes having good contracts and systems in place.

“I’ve seen deals where we’ve been negotiating for a while and I finally get to look at the seller’s contract and it was clearly copied from some other company, maybe one of the large national providers and somehow when they rewrote it they made mistakes,” Pritchard said. “I’ve seen where people mistakenly put that the dealer cannot assign an agreement without the customer’s consent. I always recommend that you buy a contract from a lawyer that serves the industry.”

According to Davis, many times dealers have unrealistic expectations about the value of their companies and he advises owners to enter the selling process with a “question mark” about their value and seek professional advice to determine what their company is actually worth. Davis added that it is also paramount for sellers to review all of the contracts in their files, especially monitoring contracts as that is what the buyer is essentially seeking in the deal.

“Many alarm dealers provide contracts for wholesale monitoring on their accounts and some of the wholesale monitoring stations have taken it upon themselves to include a phrase that gives them the right of first refusal if the dealer ever decides to sell his company,” Davis explained. “What that means for a dealer is they could wind up negotiating a good transaction and then they discover that they have to wait 60 or 90 days so the monitoring company can have the ability to look over the contract the dealer has with the purchaser and decide whether or not they want to buy it at the same price and terms.”

Davis said that dealers need to make sure that all of their contracts are standard contracts for the alarm industry and include phrasing that protects potential buyers.

“The overriding thing that a dealer has to go through is an understanding that it’s a process, it’s a well-played out process that has been done before and he needs to have an ‘A’ team behind him,” Davis said. “He needs to have an accountant or someone that can help him understand the financial side, he needs to have a good lawyer, someone that will protect him in the contract that is written and he needs to have a good business broker who can structure not only the best business deal, but also the best potential buyer.”

Because the negotiation process can be arduous, Pritchard said being prepared well in advance of a potential sell will help in the long run.

“When you go to sell your company, you’re going to have to do two things at once – run the company as you ordinarily would and you’ve got to go through the process of selling your company – which is an exhausting process,” he said. “You could end up spending half a day on the phone with the buyer, your lawyer, the buyer’s lawyer, and have to go back and turn to your business for the balance of the day. You want to be adequately prepared going into the process to make sure you’ve got good systems in place and have the data that the buyer is going to ask for.”

Both Pritchard and Davis agree that dealers who are looking to sell need to retain legal help from those that have experience in the industry, not just a family or hometown attorney. Pritchard said he’s been involved in negotiations where sellers have retained an attorney that specialized in divorce, DUI or personal injury rather than purchasing agreements.

“You don’t know what you don’t know,” he said.

Also, because all of these types of deals are based on a multiple of recurring revenue, dealers need to understand the value of good recurring monthly revenue and not simply base their company’s valuation on the number of accounts they have.

“If you don’t have good recurring revenue, you’re going to suffer,” Pritchard said. You need to have good customers, good contracts and good systems in place. The RMR really is the lifeblood of what you’re selling and you have to understand it. Plenty of times sellers don’t’ get paid for all of their accounts, only those that are deemed qualified.”

Pritchard said that he advises sellers to perform due diligence on their companies prior to a sell as if they were buying it for themselves.

“The seller never knows as much about his company before he sells his company,” Pritchard said. “The single most important thing in negotiating is information. Having it at your fingertips or having it where it can be easily accessible is beneficial.”