Buy? Sell? Do Nothing at All?
The Anatomy of a Transaction for the Sale of a Company
From Security Sales, January 2007
Whenever independent alarm company owners get together, whether in small groups or large, at some point, invariably, the questions come up: “Does anyone know what the multiples are?” Or, “Does anyone know if this is a good time to sell?” And of course, whenever I do a talk or seminar for alarm dealers, I am always asked those questions — and usually a lot more about selling a business.
During my business career, I have been fortunate enough to be involved in hundreds of acquisitions and/or divestitures. I’ve seen what it’s like to buy and sell, and I’ve seen the turmoil and lack of knowledge on both sides of a transaction that seems to cause “paralysis by analysis.” Of course, representing sellers of alarm companies is all we do now. In so doing, we’ve been involved in dozens of transactions and we’ve learned a few things along the way that can help today’s seller to better evaluate the opportunities that are there and fully understand the questions that should be answered before a decision is made. The following represents an overview checklist that alarm dealers can think about in getting ready to make a decision about selling their company. It is by no means complete, but it does cover all of the bases that require consideration:
1. 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 momentarily frustrated with something that has happened that’s caused you to be frustrated? Is this the best time in your business career — on an upcycle or a downcycle? And most importantly, if you did decide to sell, how would you feel deep down inside, once the transaction is completed?
2. Is your business 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, a boat or a car — you want any of those to look their best to make sure that a buyer is in fact going to get what he is looking for).
3. Put your transaction team together
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 concerned primarily with the process of bringing you together with a potential buyer. Of course, 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 legal nature. 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 they 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 in the process, very frequently the industry lawyer and your own corporate attorney will work together to protect you during the process and after the process is completed.
The financial guy, the accountant, the financial planner, the CPA, regardless of what 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. I have heard of taxation percentages that go as high as 55% 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, as a seller. The “financial guy” can help not only structure the deal to minimize the impact of taxes, but also can 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 to lay that out).
The final member of your seller’s “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) and is someone who you will take in to your confidence about the proposed sale to help you accomplish your mission in as quiet and as expeditious a manner as is possible.
A few comments about the selection of the members of your “dream team” are probably in order. These are people that you are going to be spending a fair amount of time with and are going to develop, very quickly, an intense relationship with you. You need to make sure that you are comfortable with all of the players, and more importantly, that you have access to them, when you need them. Ask a lot of questions in the beginning. Will they give you home phones, cell phones and personal e-mail addresses? Are they accessible, most of the time? Do they have the ability to respond in a timely manner when they’re not available? Are all calls interceded by a secretary or an administrative assistant, and if so, is that person an impediment to effect communications? In the case of a “broker,” it is important that the individual or firm selected is knowledgeable about the industry, has strong contacts in the industry (he or she should have nothing less than an amazing Rolodex, and they should show it to you!). And, finally, they should provide you with recent references of at least three transactions that they have put together. In fact, the same holds true for all members of your team.
Step 4. The Structure
The seller and his team start the process of determining the best way to structure a transaction. Is it a stock sale (sometimes difficult to do), or is it 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 LOI (Letter of Intent).
Step 5. Getting A Buyer
The finder, or broker, goes out and finds a potential buyer, negotiates an agreed upon 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, and can hide many little “gotchas” that a less than knowledgeable advisory team might not pick up.
Step 6. The Price
The multiple is agreed upon and the LOI is prepared. This brings up a whole discussion on what the kind of multiples are that are being paid in the alarm industry today. Since many transactions are confidential, I can only share with you what we’ve been able to accomplish and in conversations what I hear about throughout the industry. The most important fact is that multiples are high, perhaps higher than they’ve been in years. We are seeing and doing transactions where the multiples are in the 40X range for companies that are at least $50,000 a month RMR and up. This number is in sharp rebuttal to other reports that would suggest that multiples are considerably lower, and I can only tell you of the dozens of transactions that we’ve been involved in where the numbers are for the most part in the upper 30’s 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, the “hair” on the transaction, i.e. lack of contracts, lack of owned telephone lines, etc.
Step 7. The Legal And Due Diligence Process
Once the LOI has been accepted, the lawyer takes over and negotiates with the other side the terms and conditions of the transaction. Simultaneous to this another thing is taking place which is 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 is 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 be existent.
Step 8. The Contract
Contracts are reviewed and agreed upon and a date is set 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 that the terms and conditions are such that it will allow the seller to gain maximum tax benefits, the final small points are negotiated and/or agreed upon.
Step 9. The closing
This is a momentous time for the seller, because it represents the culmination of his or her life’s work. It’s important, it’s the time where money is transferred in to the seller’s account, and it 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, the buyer and the seller shake hands and money is transferred into the seller’s bank account (usually done invisibly by the buyer on behalf of the seller). Everyone packs up their bags, smiles at everyone else, leaves the office (which is usually the attorney’s office) and the buyer goes back to running the business and assimilating everything he has to and the seller usually goes off to celebrate, but deep down wonders, “Is that all there is?” and almost always suffers a letdown. This is natural, 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.
Step 10. Let The Fun Begin!
The seller goes off and enjoys the rest o
f his life! After the brief moment of letdown or what is known as seller’s remorse, almost always, they recover (usually when the bank has confirmed that the money is actually there) and the seller restarts in his mind’s eye the plans that he had in place that the transaction was intended to initiate. And that’s usually when the seller’s fun begins. And that is the process that takes you from beginning to end, in less than the 10 minutes it took you to read this article. In the real world, it generally takes 3-4 months, and I’m sure there will be many who read this article who will think of at least a dozen other steps that should have been put in, and maybe a few that should have been taken out, but generally speaking, this is what happens.
The following tables illustrate the range of multiples that we have seen from our perspective. They may or may not be an accurate representation of everything that goes on in the industry, but they do represent what we have seen from the transactions we have been involved with, along with our knowledge of other transactions in the industry:
TRANSACTIONS WITH ASSET PURCHASES ONLY:
|COLUMN #1||COLUMN #2|
|GROSS RMR||RANGE OF MULTIPLES PAID|
|$10,000 and under in RMR||28X – 32X|
|$25,000 and under in RMR||32X – 37X|
|$50,000 and under in RMR||36X – 40X|
|$100,000 and under in RMR||38X – 41X|
|$250,000 and under in RMR||40X – 42X|
|$500,000 and under in RMR>||42X – 46X|
This assumes that the seller has a quality company, in a desirable territory, with good contracts, a reasonable blend of quality residential and commercial accounts and owns his own telephone lines.
TRANSACTIONS WITH STOCK PURCHASES ONLY
|COLUMN #1||COLUMN #2|
|GROSS RMR||RANGE OF MULTIPLES PAID|
|$10,000 and under in RMR||None*|
|$25,000 and under in RMR||30X – 36X|
|$50,000 and under in RMR||34X – 40X|
|$100,000 and under in RMR||34X – 40X|
|$250,000 and under in RMR||None*|
|$500,000 and under in RMR||None*|
* We have not done, nor have we heard of any stock transaction being done at these numbers.
If there is a lesson here to be learned in this whole process and one that requires more thought on the part of the seller, it is: DO YOUR HOMEWORK. Not just make a few phone calls, but a real due diligence on all of the members of your team to make sure that the people that you have asked to be part of your team really are “A players.” Once that is in place, 90% of the battle is over. Enjoy the process, you’ll probably only be doing it once!
Ron Davis is President of Davis Group, Inc., aka The Graybeards. He was Founder, Chairman and CEO of Security Associates and Founder, Chairman and CEO of Security Alliance Corporation. He has conducted over 1,000 seminars in the industry and could be reached at firstname.lastname@example.org.