Many of our customers have owned their security alarm business for a long time…20 – 30+ years. Some are baby boomers that are no doubt thinking about retirement. Other owners have pulled back from their business a bit, and are in maintenance mode, enjoying the recurring cash flow.
In the latter case, Cornerstone serves the valuable role of handling much of the recurring billing and collections ‘grunt work.’ That keeps overhead low, and stress down. So our big picture advice is: DON’T SELL! If you’re feeling a bit burned out, hire Cornerstone, and perhaps bring in an operations manager to handle the day to day. Take time off, recharge your batteries. Providing life safety services to homes and businesses is–or should be–a very fulfilling way to earn a living.
The Big Decision
The wonderful, high-margin recurring revenue makes it a challenge to sell a security alarm business at a multiple that comes close to replacing the cash it generates. Of course, we hope all of our customers KEEP their business for several more decades, perhaps passing it down to the next generation. But there are many good personal reasons to sell, not always involving a huge exit price. So every year, we have a few customers make The Big Decision to sell.
When to Sell
When is the best time to sell? NOT when you’re tired, when operations are messy, when things are disorganized…when you’re feeling discouraged.
The best time to sell is when you don’t have to. Any owner should be managing their business as though a well-heeled buyer is about to walk in the door. Owners always need to be ready to sell, and sell from strength. Aggressive buyers will pay a premium for strong, well-managed security companies. They’ll quickly get a sense that the company has their act together.
Most important, they’ll know the owner does not NEED to sell. Buyers will have to make their very best offer, and hope.
Getting your Ducks in a Row
In the security services industry, there are several ducks that need to be in a row when and if that fateful decision to sell happens. Some of the key ones are listed below.
Have Good Contracts!
You can’t be in this industry without hearing the importance of having good monitoring agreements—with ALL your customers. If you’ve been in the business for a long time, you may have older contract versions that are flawed, and don’t have some of the key legalese. Invest the time now to update these. It’ll be very painful at the last minute.
Know Your Numbers (Use Good Software)
Obviously, your financials and RMR will drive much of your company value. But buyers will look at many key metrics to help them understand the health of both your business, and your subscriber relationships. Good, industry-specialized security alarm software will help you easily generate all the key numbers a buyer would want. Below are some of these.
Growth Rate – Attrition Rate – Net Growth
You’ll need to present your RMR growth, probably for 1-2 years, and for recent months. Likewise, you should have your service / installation growth rates and dollar amounts, which hopefully are trending well. Attrition rates are critical. You need to not only have accurate attrition rates, you should be able to break down those rates by REASON—non-payment, moves, went to competitor, and so on. Finally, with good RMR growth numbers, and accurate attrition numbers, the NET of these two will be your net growth. See example above—the green line is growth, red is attrition, and blue is net. In this example, the company’s growing at 29%+, attrition is 16%+, so net growth is almost 13% annualized. Very handy!
RMR Composition
You’ll need to provide a detailed breakout of your RMR—e.g., monitoring, service agreements, leased systems, video systems, interactive services, etc. If you’ve coded these services separately in your software, it’ll be easy to run reports with these details. Cornerstone’s software allows this data to be exported in CSV format, which is ideal for due diligence on the recurring.
Margins
A buyer will want to see your margins, and probably by “line of business”. So it helps to break your numbers out by, say, recurring, service and installation. Then if you’ve allocated expenses across these areas, a buyer will see your margins to get a sense for how healthy they are.
Good Software
While QuickBooks is a very good accounting package, it simply doesn’t allow for easy RMR and attrition tracking. If you’re planning to sell someday—take the plunge, and invest in good, specialized industry software that gets you your key metrics quickly and easily. That’s one of Cornerstone’s big value adds. We’ve had many customers sell through the years. As sad as we are to see them leave—our software probably makes it too easy. Buyers love that our system QUICKLY gets them all the key data.
Standardize Equipment
This is tough to do short term, but in general buyers prefer buying accounts where only one or two brands are involved. That makes it far easier (and more profitable) to service the accounts. Avoid the temptation to buy several different brands based on what’s on sale that week!
Control your IP’s and Phone Lines
If your security panels are programmed to call either a phone number, or connect to an IP address, controlled by your central station—you may have lots (and lot and lots) of work to do to deliver your accounts. This topic could be an entire blog post. But suffice to say, buyers like to consolidate purchased accounts into their own monitoring centers. They want it to be easy. Make sure whatever your central station “deal”, that if you needed to sell you could forward your account connections quickly and (fairly) easily to a different central station.
Increase Rates
If you haven’t raised rates in awhile—start getting into the habit of doing this. Your costs go up every year, and your subscribers should expect at least inflationary increases every two years – and possibly annually. This can be a pain, but again, good software can help you both handle the logistics of adding $ or % to existing rates, AND communicate that rates are going up easily.
Push Autopay!
You love the consistency that autopay brings to your recurring billing. Buyers love it also, and will sometimes pay higher multiples for autopay accounts. Try a “going green” initiative to get people off paper bills and onto credit card or (preferably) bank debit autopay.
Be Ready!
Being well prepared is like being at the poker table, with an aces-high full house. You may not win the hand, but it’s very, very likely that you will. Get your ducks in a row, leverage good software to know your numbers, and if you make The Big Decision…odds are you’ll get a great deal!