Over the next decade, six out of ten U.S. business owners plan to sell their companies – a noticeable increase over previous years. Many are baby-boomers, with an eye on selling their businesses to fund their retirement and as a result sale preparation and exit strategy are high priorities. Start taking steps today to prepare your business for sale so you can maximize your long-term value and create a more profitable company.
There are several reasons why security company owners may sell their business. A few are unanticipated – insufficient earnings, insufficient working capital, divorce and illness or death.
Others reasons allow for more time to plan – retirement, a change in professional direction, and in some cases partnership dissolution.
Preparing to sell means building upon your strengths and fixing weaknesses so you can secure the best possible purchase price. Above all, make the transaction process easy for the buyer. This means being honest about your motives, expectations and business difficulties. Also, identify common buyer desires and concerns, while maintaining an open-minded attitude. This will ultimately put potential buyers at ease with the critical purchasing decision.
Planning For a Sale
Planning for a sale should include tightening your operating income by, as an example, minimizing your overtime payroll and negotiating possible rate increases with your clients. Reducing overhead expenses to the lowest possible level is also key.
There are additional steps that should be taken in the overall planning effort. Make sure that your books and records are clean and up-to-date and meet with your CPA, attorney or tax advisor to review the tax implications of the sale. Contact your insurance broker to discuss the company’s loss history and current status and review any senior debt agreements for a requirement to obtain written permission from the lender prior to selling any assets.
Locate and review all of your company’s legal documents –
- Vehicle, Equipment And Office Leases
- Loan Documents
- Insurance Policies and reports
- Board Minutes
- Shareholder Agreements.
Valuation of Your Company
It turns out many of the essential business practices you’ve used to grow your business are also essential to selling your company. This often involves many aspects, including outlining the financial history and outlook for your business; improving the bottom line; overcoming any financial problems and preparing financial records for review by prospective buyers.
Although in the security industry, a buyer’s offer is often put in terms of a multiple of monthly revenue, the dollar offer as a whole is most likely driven by the cash flow they can confidently expect to earn post-closing. There are many quantitative as well as qualitative factors that are considered by a buyer in determining that valuation besides your revenue levels. Among them are the length of time you have been in business, the quality of the client base and current management as well as the percent of contracts with Standard Service Agreements and the average account size in weekly hours.
Other areas of importance include the percentage of direct labor and a review of armed versus unarmed work. Your company’s litigation and insurance claims history as well as sound receivable management and client retention is also valuable information.
Valuations also look at your client concentration (one or two clients representing a high percentage of the business), the percent of low bid business versus “relationship-based” contracts, and the physical assets that are required for each contract – vehicles, tour systems, etc.
What to Expect
Most offers today include a cash component to the seller at closing with the remainder held back for some time as insurance for the buyer that the revenue base remains. Normally, the “Hold Back” amount will be diminished for any loss of revenue unless that loss was a result of the buyer’s actions.
The length of the Hold Back period may be determined by several factors including but not limited to – the willingness of the seller to remain with the organization throughout the period, contracts that may be in jeopardy at the time of the closing, the ability for contract assignability and the amount of time remaining on current contracts before their renewal dates
Prior to the closing, be prepared to undergo a rigorous “due diligence” process. The buyer or their representatives will likely ask to review and/or obtain copies of documents such as:
- Financial Statements
- Client Contracts
- Detailed Analysis Of Weekly Hours, Billing And Payroll
- Insurance Policies
- Loss History
- Current And Past Litigation Files
- Client Turnover Trends
- Employee Turnover Trends
- All Operating Leases
- Accounts Receivable Trends
- Accounts Payable Trends
- Vendor Agreements
- History Of Bad Debt Write-Offs
If you are considering the possibility of selling your business, Security ProAdvisors invites you to contact us to discuss your opportunity and qualify for a free 30-minute consultation. You can reach Keith Oringer, President of Security ProAdvisors at 908-470-0027 or at email@example.com. Please visit our website at www.SecurityProAdvisors.com for more information.
About Keith Oringer
Keith is a security executive with 24-years of experience with extensive experience in the acquisition of companies and valuation. He was the 3rd employee of a national company and was instrumental in building the company over 20 years to over a billion dollars and 46,000 employees and the President of a $100 million business unit. Keith holds both a CPA and MBA in finance.