For Informed Buyers and Sellers, Change Can Be a Good Thing
Unless you’ve been secluded in a remote cave for the past five years, you’ve probably noticed that the acquisition landscape of the security industry has changed dramatically since the mid-1990s. Most of the “free” system sales pitches have disappeared and buyers of alarm companies are no longer pinning all of their hopes for profitability on recurring monthly revenue (RMR) from monitoring services. Additionally, the nationals, like Protection One, Brink’s and ADT, are sitting on the sidelines, and large regional and local companies are now the primary players in the acquisition game.
The prices paid by acquiring companies have also changed. Buyers are now paying multiples* in the mid-to high 30 range for quality alarm dealerships. Less desirable alarm companies on the market, on the other hand, are fetching multiples in the mid-20s to low 30s.
This leveling off may be due, in part, to the recent economic recession. Additionally, potential buyers are conducting more in-depth due diligence because of what they see as the failure of the “free” system business model. “People are really looking under the hood and realizing that not all alarm companies are equal,” says Bill Polk, president of St. Louis-based SLP Capital. “Buyers are far more discriminating than they were in the past.”
Another development is the migration of many traditional alarm dealers into the commercial and residential systems integration market. This means that their businesses, in addition to relying on monitoring RMR, are focused on healthy cash flow and profitability from equipment sales and installations. This makes quantifying the value of a company more challenging.
So what should you do if you’re a traditional alarm dealer, integrator or combination of the two that wishes to sell or woo financing for expansion? First and foremost, you should adopt policies that will provide your company with a low attrition rate, healthy cash flow, standardized equipment and high customer credit scores. These factors, as well as the others listed below, will make your business attractive to potential buyers and financiers.
Buyers and Financiers Like Well-Run Companies
Regardless of whether you are a traditional alarm dealer, integrator or hybrid, you should run your business like you’re going to sell it tomorrow. You never know if you will be faced with one of these situations: divorce; death; retirement; split-up of your partnership (which can be as acrimonious as a divorce); dealer program repositioning; sell-off of poorly performing branches; financial difficulties (e.g. unpaid back taxes); or burnout.
Larger Account Bases Get Attention, Better Pricing
“All things being equal, the larger the account base, the greater the value of the company,” says Polk. Besides the obvious volume advantage, the legal and accounting costs of doing a transaction are the same whether you’re selling/purchasing 2,000 or 20,000 accounts.
Another factor scrutinized by buyers and financiers is account geographic concentration. The greater the concentration of alarm accounts in one area, the more attractive the company. Conversely, if the accounts are dispersed across the country, they are much more difficult to service and control and, thus, not valued as highly.
Buyers Want Low Attrition Rates, Midpriced RMR
Consumer credit worthiness is another aspect considered when evaluating an account base because, usually, the lower the credit rating, the greater the attrition rate. In general, a consumer’s Beacon score should be greater than 625. Dunn and Bradstreet scores can be used to evaluate commercial customers.
There are several other factors that influence a company’s attrition rate. Accounts with short-term contracts (month-to-month or yearly) are not considered as valuable as those with three-year contracts. Direct debit for the payment of monitoring fees is another way financial experts believe a company can reduce its rate of attrition. Also, if the installation price of a system is relatively significant and paid up front, attrition will most likely be lower.
Standardized Equipment Is More Attractive
Jamie Orvis, president of Security Solutions Inc. in Wilton, Conn., says that when he considers purchasing a company, “We take into account the type of equipment used. Did they use 20 different types of panels or did they use one?” Additionally, the age of the equipment is key when evaluating a company’s worth because older equipment requires more service and is usually not downloadable. Along those same lines, accounts with lifetime warranties are discounted because these agreements tie a dealer into servicing older equipment.
Telephone lines are another important factor in the acquisition equation. If possible, a dealer should own his own lines and ensure that they can be easily switched from his central station to the buyer’s monitoring center.
If you have multiple branches, it’s also a good idea to batch your phone lines by location.
Delinquent Accounts Can Discourage Buyers
Past-due payments can be hazardous to the health of both traditional alarm dealers and integrators. These can be warning signs to potential buyers to steer clear.
For integrators in particular, because so much cash and stock are tied up in one job, if a client is 30 to 45 days past due on a payment, that issue alone could be an indication of trouble. With alarm dealers, the time frame for payment can be a bit more lenient. Still, most experts agree that there is a limit.
Be Sure Your Contracts Are Signed and Up to Date
Buyers are usually very appreciative of sellers who have their contracts in order. The contracts should be assignable and include, among other things, third-party indemnification, limit of liability clauses, subcontracting clauses, as well as a signed acceptance or rejection of back-up transmission equipment and services.
If your contracts are not in order and you are trying to sell your business, most likely it will be your responsibility to track down the stragglers and get them to sign new documents. Some buyers even insist on having all of their new customers on their own contracts.
Integrator Business Basics Affect Perception of Value
With most integration companies, their value is based on earnings and profitability rather than RMR. Generally, some sort of multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) is used by the finance industry to determine company value or credit worthiness. But let’s back up for a minute and look at what most would call a typical integration business.
Compared to traditional alarm businesses, integrators must stock significantly more equipment because they are working on larger, more technically intense projects. Job lengths can run anywhere from 90 to 180 days, so it takes longer to get paid. According to Mitch Reitman, principal of SICC Inc. in Coppell, Texas, “Integrators, to some extent, wind up extending credit to their clients for short periods of time, but for large amounts of money.” As a result, cash flow can be a huge problem.
Whether you want to get more financing or sell your company outright, both financiers and buyers will want to see that your business has an attractive balance sheet. That means having a history of paying your bills on time, collecting your bills promptly and keeping enough cash in the bank. Additionally, direct costs (the price paid for equipment used on the job), fixed assets, debt and overhead should all be closely managed.
Prove You’ll Generate Future Business
Quantifying your ability to generate new business may be one of your trickiest, yet most important tasks. If your business has long-term service contracts, this may be considered credible evidence that you will have future business. Additionally, if your company can convey strong<
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