When it comes time to sell their companies, many owners are often dismayed to learn that the price buyers are willing to pay is determined almost entirely through a formula that applies a multiple to their qualified RMR. Many owners think this valuation formula gives them credit only for their accounts and ignores other valuable company assets that they’ve worked hard to create, including intangibles like longevity, reputation and good will, sales leads and ongoing referral sources, as well as tangibles such as trucks, equipment and inventory.
But that’s not really true.
Here’s what is true (generally). There is no question that RMR is the gold standard for valuation in the industry. It’s what buyers are looking for when they acquire companies and their accounts. The price buyers are willing to pay is expressed as a multiple of
qualified RMR. At any time, there is a generally accepted range of multiples that buyers in the industry are willing to pay for accounts and it’s based on a number of factors including:
- supply and demand;
- available financing or capital sources in the market;
- the current health of the industry and predictions for the future; and
- the health of the economy as a whole.
The exact multiple that a buyer is willing to offer a seller is also determined by the buyer’s own specific criteria for acquiring accounts. There are a number of standard criteria that most buyers look for – without them, a seller’s accounts are worth little or nothing. They include:
- Proper contracts for every account (current and in force, with proper signatures and the required contract clauses, at a minimum);
- Accurately stated attrition rates, at or below industry standards,
- Properly documented and maintained customer account records and business records;
- Use of dedicated phone lines; and
- Use of standard or widely accepted products and technology.
In addition, most buyers have their own criteria for determining the multiple they are willing to pay. These may include:
- Geographic location of the accounts;
- Number of accounts;
- Mix of accounts (residential and commercial) ;
- Ease of moving accounts to seller’s monitoring facility;
- Ownership of 800 number;
- Financial health and profitability of the seller;
- Seller’s use of good business practices and standard operating procedures; and
- Seller’s good will and reputation, especially if the seller intends to remain in business and service the accounts.
In other words, based on its own criteria, a buyer may offer a higher multiple for the accounts of a profitable company with a long-standing and excellent reputation for customer service, with a track record of customer referrals or a well-established sales program with ongoing leads. Depending on the buyer, the multiple may also take into consideration any tangible assets that are part of the deal, such as inventory and equipment. Some buyers may factor those into their offering price in other ways. (To find out what your accounts are worth compared to our competitors, visit our
Portfolio Calculator.)
And here is the most important thing of all: e
very sale is unique. The best deal matches up the right buyer with the right seller and, within the generally accepted industry formula, there is room for all sorts of negotiations if the parties are the right match.
To learn more about what factors may influence the value of your accounts, read this
blog, which includes our
Due Diligence Checklist. You can also find valuable information in our white paper,
Transforming Your Company Into a High-Value Business.
