Whether you’re looking to expand or downsize, consider us your partner in success. Our team of industry experts are here to support you with valuable resources and connections. We’re happy to present the following article from Jim Wooster Jr. of Alarm Financial Services (AFS). Jim shares his industry expertise, offering critical insights that can help prepare your business for an acquisition.
Jonathan Sherrell, Director of Sales
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The team from Alarm Financial Services has been involved in hundreds of acquisitions over decades in the electronic security industry. As a buyer, seller, lender and advisor, we have seen all aspects and all angles of the process, most of the time with our own money at stake.
In contrast, for the owner of a security and life safety company, the acquisition of another company may occur only a few times in a career. So, purposeful consideration ahead of an acquisition is essential to increase the value and ensure a smooth process.
AFS has identified seven important things to consider when acquiring a business:
1. Cash Flow
This should be the starting point for coming up with an offering price. For better or worse, our industry has adopted a mindset that Recurring Monthly Revenue (RMR) based companies should be valued at a multiple of RMR. This misses the point that the same amount of RMR could yield wildly different profit, or cash flow, from one company to another.
2. Culture & Fit
This applies both to the culture and fit of the existing employees as well as the customer base. If your customers are used to paying fair prices for repair service, what will happen if you acquire a customer base that is used to getting everything for free, just to “keep the customer happy”?
3. Geographic Overlap
This consideration can go both ways. By purchasing a company in your existing geographic footprint, efficiencies can be realized when it comes to number of service calls or installations per day. However, acquiring in a new location can create instant critical mass in a new area and avoid the slow and expensive ramp-up time of starting a new office from scratch.
4. Acquiring Talent
Evaluating the employees who might come along with an acquisition can be just as important as evaluating the customer accounts. A common complaint we hear from alarm dealers is how difficult it is to attract and retain talented employees, especially technicians. An acquisition provides the opportunity to acquire proven talent, who also happen to know the customer base. When we ask alarm dealers to evaluate the success of an acquisition after the fact, employees coming on board is one of the biggest “make or break” determinants.
5. Defending Against Competition
That business for sale in your market is going to end up with some existing alarm company, either yours or your competitors! So, passing on a good opportunity may not only weaken your position, but it could also strengthen your competitors.
6. More Services to the New Customers
When alarm dealers ask us how they should come up with an offer amount for an acquisition, we recommend two price components: one for the RMR (or, more accurately, net cash flow) and one for the value of the new “stuff” that can be sold to this captive customer base. Typically, we find that owners of small alarm companies often have one foot out the door years before they finally end up selling. This means they have not been offering the latest and greatest technology to their customers, opening the door for you to do so. And don’t forget to ask for referrals.
7. New Services to Your Existing Customers
This is the flip side of No. 6. Perhaps you’re focused on intrusion systems and have been wanting to expand into fire or access control. Developing the expertise and customer base in these areas can mean a lot of time, money and lessons learned the hard way. A seller that already has expertise in other services can you there on day one. This is known as the “buy or build” decision.
Of course, there are many more considerations that come in to play when making an acquisition but starting with those listed here will go a long way toward making a successful deal.
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Jim Wooster, Jr is President of Alarm Financial Services, Inc. the industry’s oldest financing company. AFS assists companies prepare for a sale through its Pre-Sale Due Diligence Services. More information at www.alarmfinancialservices.com.
