Succession Planning: Exit, Stage Right

Exit planning should formally begin at least 12 to 18 months in advance.

This article originally appeared in the August 2012 issue of SD&I magazine

Every owner exits their business eventually, it is just a matter of when, how and if the exit was successful in meeting their goals.

The systems integration and security dealer industry is full of hard-charging business owners who are creating value for their families, employees and customers every day in the market. While some are multi-generational enterprises, most will be built and eventually sold by the founder or founders. With the baby boomer generation now in their 50s and 60s, it is common to see successful business owners want to cash out on the hard work and sweat equity they have invested in building their business. To maximize value and increase the probability of a successful exit, an integrator should begin planning their exit strategy at least 12 to 18 months in advance of a potential sale of their business. Many critical decisions need to be made before they can enjoy the fruits of their labor.

Let’s take the hypothetical case of two successful integrators. Fred is the sole shareholder and CEO of Southwest Security Systems. His father started the business 35 years ago and Fred bought his father out 10 years ago. Fred is now 58 years old. The company offers access control, CCTV, alarm and fire systems and has offices in four cities. Revenues have been as high as $12 million in some years, but their performance varies greatly because of their ties to new construction. Profitability has also varied widely from year to year and while there have been efforts to build recurring monthly revenue and the service business, Fred hasn’t found the “right guy” to build that side of the business. Fred would like to sell his business, but is heavily involved in the day-to-day management and believes the right buyer will someday appear.

Bill, on the other hand, is the CEO of Mid-Atlantic Systems, a 15-year-old firm focused on servicing two vertical markets, retailers and sports facilities. Bill and his two partners are in their 50s and want to exit the business. They have grown consistently and are doing a great job managing both their topline and bottom line. Last year Mid-Atlantic had revenues of $15 million, up 23 percent over the previous year, and produced net income of $2.3 million. Clients recognize their exceptional security design capability and outstanding project management. The company has had an initiative to offer video monitoring and managed access control which is being requested by new vertical markets. Bill has spoken to some potential buyers in the past but wasn’t ready to sell. He has been keeping his “eye on the market.”

While each of these fictional owners has a good company they will most likely have very markedly different results when they sell their businesses. Why?

Evaluation by potential acquirers

Strategic buyers are looking for several things when they evaluate a potential acquisition candidate. They want to see that there is a strategic fit, manage the downside risk of their investment and see that there is an upside opportunity to grow the business. Strategic fit is a relatively simple exercise based on a potential acquisition candidate’s location, product lines, service capabilities and size of the business. Buyers manage downside risk by looking at the quality and stability of a company’s revenue and earnings. When it comes to growth, a buyer will want to see that a company has the right people and is in attractive markets with plenty of potential to grow.

What should the integrator or security dealer who knows they want to exit their business do? While there is plenty of “art” in the process of selling a company, a formalized approach to getting prepared to sell is critical for improving the probability of a successful outcome.

There are seven steps that we see in successful transactions and transitions of ownership.

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