It used to be that the family business was passed on to the next generation. Time, social/cultural differences and economics have changed that reality and today, many privately-owned alarm dealerships are selling the business rather than keeping it in the family.
To get a read on the situation, we talked to three industry experts who provided an interesting perspective on the subject, including the best ways to go about selling your business and some excellent advice on how to maximize the transaction.
SD&I: What are some financial and business management tactics to make a company more attractive or more profitable prior to a sale?
Michael Barnes, founding partner of Barnes Associates Inc., St. Louis,: “It’s important to know your metrics and how to create value for invested capital. There are four high-level metrics you want to be able to articulate and defend: 1). your cost to create new customer recurring monthly revenue (RMR); 2). profit margin realized on the RMR and related revenues; 3). RMR and customer attrition rates; and 4). speed of growth. These four metrics can basically define how value is created and at what rate.
Investors and acquirers also like defined opportunities that can be addressed with a crisp narrative that clearly says what your organization does and who you are. Our research supports the idea that companies both tend to perform better and realize higher market values when there is focus and clarity from the management team.”
William Schmidt, managing director, Security Lending Group, Capital Source, St. Louis: “I have found that the most successful companies in the alarm monitoring business focus on three important factors: originating high quality accounts at a reasonable cost (rational creation cost); providing excellent customer service to maintain a low attrition level; and providing monitoring and service in such a manner as to ensure a high margin on the recurring service revenue.
Companies that routinely put processes and reporting in place to manage these metrics typically result in superior cash flow positions.”
Ron Davis, founder and president of the Davis Group, Long Grove, Ill.: “The things that make an alarm company attractive to a potential buyer and which can be readily determined are: number one, good valid contracts for every customer complete with ample industry standard phraseology. Secondly, if the alarm company accounts are on their own telephone lines as opposed to a wholesale monitoring company’s telephone lines, because alarm company-owned lines are more easily moved. The third consideration is the company’s profitability, both from sales and from RMR. Finally, the fourth is account attrition, which relates to stability.
Delving deeper, potential buyers will want to determine how predictable the business is going forward (i.e. assimilation problems, etc.) and what economies can be extracted from the acquisition so that a profitable transition can take place sooner rather than later.”
SD&I: What kinds of things are investors looking for in companies they want to invest in/buy? What’s important?
Barnes: “Generally, investors are looking for companies that have a proven track record and a business model that is competitive, able to grow and is supported by an internal organization that is capable of handling the growth. Particularly important in today’s market climate are clearly defined operations and processes for creating investor value (i.e. metrics). Investors want to know what they are getting into and want their questions answered with supporting data. All things being equal, the higher value will generally go to the better documented opportunity.”
Schmidt: “While investors may indicate certain attributes that they find desirable, these attributes will almost always be based upon the fact that rational investors are looking for two things: strong operating cash flow (existing and post-consolidation economies) and the ability to predict that cash flow stream into the future. As such, the attributes needed include high levels of recurring revenue (improved ability to predict future cash flows) or high levels of growth (indicating higher levels of cash flow and improving margins).”