By: Rory Russell, AFS Mergers & Acquisitions
Small business owners constantly juggle critical decisions on where to best invest their money. Should you upgrade your equipment? Add on new services? Increase your marketing budget? While the business is expanding and thriving, the thought of selling “someday” might seem like a distant concern.
However, ensuring there are some important must-haves in place now, will help position your alarm company for a future sale, whether that’s a long-ways down the road after a well-earned retirement, or sooner than you think due to an unexpected circumstance.
There are must-haves for ensuring your company sells at a premium price, whenever that day comes.
Strong Customer Contracts
The single most valuable asset your company has is…. your contracts! Well-structured and current industry standard contracts can make a significant difference in the valuation price of your company.
Contracts should contain an automatic renewal clause (sometimes referred to as an “evergreen clause”), to the extent allowable by state laws, which vary. Include assignability language that allows you to properly transfer ownership of the accounts to a new buyer, without the customer having to sign a new agreement. Conversely, you should not rely on auto-renew alone. It behooves any security company to track expiration dates of the initial contract term and contact the customer to sign a new contract. This builds in a reason to contact the customer with the opportunity to sell additional services and systems.
In addition, your contracts should provide a limitation of liability against you and your business in the event there is loss of property and/or life at a home or business where you’ve provided an alarm system or service. Also, for residential sales, your contracts should have a three day right of rescission provision (along with the appropriate form for the customer to exercise that right) and you might consider having an indemnification provision in all of your contracts, whereby the customer holds your company harmless from any damages arising out of a failure of system or service.
Your Own Telephone Line
Do you use a third party monitoring center? If so, do you own the telephone line that connects your accounts to the central station, so that upon sale, the accounts can be transferred to the buyer’s central station facility via a simple line-swing?
If not, and systems have to be reprogrammed either through a site visit or remotely from the central station, the buyer will expect you to reimburse him for the cost of doing so. If you think sharing lines is a common practice that shouldn’t impact your selling price – we’re here to say that it isn’t, and it does negatively impact the selling price.
As brokers of numerous acquisitions, we’ve seen this often used by buyers in negotiations to reduce the selling price. Buyers know that it can be costly to reprogram customers (either through site visits or downloads) to a new line, and they are going to want you to shoulder that cost, not them.
Diversified Account Base
Work towards a well-diversified account base, with a mix of residential and commercial clients, as well as a mix of services. This doesn’t mean you need to go crazy and be all things to all people, but it does mean you should keep, or improve, the balance. Having signed clients for a balance of core services that are consistently offered in your area (for example, fire, intrusion and video) will decrease your risk of lost accounts and improve your appeal to buyers.
Orderly Paperwork
Keep your bookkeeping up to date and your accounts receivable current. In addition, your accounting should be constructed in such a way that you can manage and evaluate the various sectors of your business to determine what is profitable and what is not.
You should also review your licensing and insurance on an annual basis to ensure you have proper coverage for the various services you offer, as well as your employees. Buyers will scrutinize your paperwork and your financials, looking at any vulnerabilities as a reason to lower the valuation. Gaps in insurance coverage and/or compliance can impact your selling price, as can poorly kept financial records.
Keep Attrition Under Control
What’s the standard attrition rate in your geographic area? A higher-than-average attrition rate is a red flag to a buyer that they will need to overcome lingering negative perceptions of the company. This can definitely impact the price you are offered for the company, as rebuilding a client base is much harder than taking over a business with a solid reputation.
Manage It All with an Annual Review
It’s easy to get caught up in day-to-day operations and not realize that one or more areas of your business might be slipping. Schedule time each year for your own internal audit that keeps you mindful of your must-haves and aware of what areas of your business are positioned for optimal value, and just as importantly, which ones aren’t.
Being mindful and executing on these best practices will ensure that when the day comes where it is time to sell, even if it’s under pressure due to unforeseen circumstances, you can expect to receive a price that reflects the hard work you have poured in to your business throughout the years.
ABOUT THE AUTHOR
For more than 20 years, Rory has been president and owner of AFS Mergers & Acquisitions. As a top alarm company broker, he specializes in mergers, acquisitions, and financing for fire alarm companies, security companies, integration companies – representing over a billion dollars in transactions. Prio to founding AFS, Rory Russell owned and operated Empire Security, at the time the largest regional security company in the Northeast, handling $5 million per year in sales and installations.