By: Rory Russell, AFS Mergers & Acquisitions
Valuing an alarm company is a complex process that requires a deep understanding of both the industry and the financial landscape. In this interview, Rory Russell sheds light on common pitfalls, strategies for growth, and how to ensure a company’s long-term success post-sale.
In Your View, why is valuing alarm businesses difficult?
Unlike selling a car where you can look up the market value in a ‘Blue Book,’ there’s no universal guidebook for business valuations in our industry. This lack of standardized information leads to a lot of misconceptions. I’ve heard countless stories where sellers boast about landing enormous deals that aren’t reflective of reality.
Some brokers will promise sky-high valuations just to secure a client’s business. They might paint a rosy picture, but when it comes time to deliver, they fall short, leading to disappointment and wasted time for the business owner.
It’s important for sellers to ask potential buyers about their plans for the business. What do they envision for the first 100 days, the first six months, or the first year? Will there be significant changes to operations, staffing, or company culture? Understanding these intentions can help owners gauge whether the buyer’s goals align with their own values and expectations.
I always advise clients to go a step further by speaking with previous owners who have sold their businesses to the same buyer. These conversations can provide invaluable insights into the buyer’s track record and how they handle transitions. It’s one thing to hear promises during negotiations, but firsthand accounts can confirm whether those commitments hold true in practice.
How can owners choose a deal structure that aligns with their goals?
Deciding on the right deal structure depends largely on the owner’s personal and professional goals.
If the buyer has a strong track record of growth and success, considering a partial rollover could be beneficial. This means retaining a minority stake in the company, which can lead to additional income down the line as the business continues to grow under new management.
For owners who believe their company has significant potential with the right investment, stock incentives can be an attractive option. This not only aligns the interests of the seller and buyer but can also provide opportunities to reward key employees. Negotiating stock options for essential team members can help retain talent and motivate them during the transition period and beyond.
How can Private Equity-backed firms expand service offerings to boost recurring revenues?
Recurring revenue streams like service contracts are vital for sustainability and growth. A PE-backed company can take several steps to enhance these offerings. First, the buyer can work with the existing team to assess the company’s current capabilities and identify areas where service offerings can be expanded or improved, leveraging the skills and experience of the workforce.
One effective strategy is to focus on existing installations. By reaching out to current customers, the company can offer additional services, upgrades, or maintenance plans that provide ongoing value. This requires a different approach than selling new installations; it often involves building long-term relationships and demonstrating continued commitment to the customer’s needs.
Hiring experienced service sales personnel who specialize in this area can also make a significant difference. These professionals understand how to present a range of services to clients and can tailor solutions to meet specific requirements. By investing in this aspect of the business, a PE-backed company can create steady revenue streams that contribute to long-term stability.
What Is Your Final Advice to A Business Owner Looking to Buy or Sell?
It’s important to be cautious of exaggerated claims, especially those you might see on social media or hear through the grapevine. Stories of exceptionally lucrative deals can be misleading and may not reflect the reality of most transactions. Similarly, generalist brokers who don’t specialize in the fire and life safety industry, for example, may not have the specialized knowledge needed to navigate its complexities.
For business owners, the best course of action is to partner with a trusted broker who has extensive experience and can help identify credible buyers and structure a deal that aligns with your goals. They can provide valuable guidance throughout the process, ensuring that you’re making informed decisions and positioning your company for a successful transition.
ABOUT THE AUTHOR:
For more than 20 years, Rory has been president and owner of Acquisition & Funding Services (AFS). 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.