Preparing To Sell? Avoid These Major Pitfalls

At some point during the lifecycle of your business, you may decide you want (or need) to sell some of your accounts—or even your whole business. You’ve been in the industry for quite a while now; so you read the trade publications, attend conferences, and know you have the option to sell and that you’ll likely have buyers at the ready. However, just having a buyer on the hook does not mean you’ll get the best deal. In order to get the most value and ensure the success of one of the most significant business decisions of your life, you need to determine your priorities, evaluate the timing of your sale, and get your business ready to showcase. You also need to understand some of the biggest pitfalls that can deflate the value out of any potential deal. Before you begin conversations with potential buyers, review and rectify these three possible trouble spots:

Owning Unacceptable Contracts

When you do start a conversation with a buyer, one of the first things they will ask for is to see your Subscriber Agreements. There are some cases where you might be thinking, “We don’t use contracts, just a handshake” (this is rare, but it happens). If that’s you – this practice may have seemed like a good idea at the time, but if you don’t have actual, legally binding agreements, you have nothing to sell.

In other cases, the language in the contracts may not be in compliance with the legalities of the particular state in which they do business, thereby making the contracts unacceptable to the buyer. It’s not because the buyer is unreasonable or overly demanding, it is likely that a buyer does not want to absorb the liability that the contract would not provide proper protection in a court of law or that the buyer’s banks or investors will not loan the necessary funds to complete the transaction if the contracts aren’t in compliance.  For a contract to be legally salable, your state requirements and specific language must be included.  You should have your contracts reviewed periodically, by an attorney familiar with this industry (and preferably in your state).

You may find out you’ll need to get all newly signed contracts from each of your subscribers. If this is the case, you’re far better finding out prior to the time you’re negotiating with a buyer.

Attrition Level Too High

Attrition is a key metric in the security industry. It directly impacts the ultimate value of your accounts in an acquisition. It can also be one of the most misunderstood concepts in the alarm industry. That’s why it’s known as the “silent killer”.

Many security company owners are shocked to learn that their attrition rate is much higher than the estimate – in part because they don’t know the essentials of attrition: how to calculate an accurate attrition rate, the important difference between gross and net attrition, and what these rates really mean in terms of revenue and account value in an eventual sale.

In order to lower your attrition rate, you must:

1. Understand and address the reasons your customers are canceling;
2. Focus on the customer experience as an antidote to attrition; and
3. Use a best-in-class sales program to minimize attrition from the start.

RMR Lower than Expected

Unlike many other industries, the alarm industry estimates the value of its companies based on a multiple of your RMR. That means that RMR is going to be the crucial determining factor as to whether or not you exit “successfully”. RMR determines cash flow and, with the proper margins, can increase your company’s value. Not having a handle on it, however, is a trap you want to avoid.

Understanding the “true value” of your RMR depends on your answers to the following questions:

• Do you have the right customers who will continue to stay with you over the long haul?
• How healthy are the margins associated with your RMR?
• What is your probable attrition over the next five years?
• What is the current open market rate of your RMR (We’ve got a handy calculator to help you with this one.)

If a buyer determines that your margins are not as healthy as they’d like, your attrition rate is too high, or you are uneducated regarding the current market rates, you may be overvaluing your RMR and will be unpleasantly surprised at the offer you receive.

Whether you intend to sell some or all of your accounts, are looking to exit your business – or maybe you aren’t even considering a sale – it’s still a smart idea to start keeping an eye on each of these common pitfalls right now. Avoiding them can provide a better return today, and build significant value into your business for when a sale is on the horizon.