Succession Planning: Exit, Stage Right

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.

  1. Identify Personal Objectives—When do you want to eventually leave the business, realizing that most buyers will require you to stay on to help transition the business for some period of time? What would you like to do after you leave? Play golf every day? Start another business? What kind of buyer do you want—does their reputation matter?
  2. Quantify Personal and Business Assets—If you sold your business today, how much money would you need to retire or move to the next phase of your life? Is there a gap? Don’t confuse what you believe you need with what your company is worth as the market will eventually determine the value of your company.
  3. Maximize and Protect Business Value—What are the key areas you need to improve in your business to make it attractive to a buyer? Hire a vice president of Sales, build the RMR in your business, drop a product or service that is a distraction? These could be components that drive the value of your business. Whatever your specific value drivers are they should support revenue growth and profitability.
  4. Evaluate Potential Alternative Buyers—You could sell your business to “insiders” who currently work in the company. Typically this requires some form of seller financing in the form of a note to be paid in the future. The other alternative is selling to an “outsider.” Outsiders, whether they are strategic buyers who are already dealers or integrators or financial buyers, will subject your business to a high degree of scrutiny or diligence, but typically pay all cash or require minimal seller financing, and offer less risk.
  5. Plan—A great deal of estate, tax, personal and company planning can be done ahead of time which can greatly impact the after-tax dollars an owner receives. These strategies take time to implement.
  6. Build a Support Team—A professional team of advisors can help you when it is the right time to sell your business and in preparing it for sale. While you could try to sell it on your own, running a competitive process to insure the best deal requires having an M&A deal attorney, investment banker and a professional accountant. Each is important and you should be cautious about an advisor who claims they can do it all. Other professionals that can be integral parts of this process include your personal investment advisor and insurance broker.
  7. Post Sale—Enjoying the fruits of your labor is many times determined by how well you have planned for the next phase.

Today the market for integrators and security dealers who are looking to sell their company and have built a profitable business with revenues exceeding $5 million is strong. Analyzing the gaps in your company and personal objectives will allow you to determine what the right timing might be.