Preparing For Life After Security

By Ray Whiting.

In 2000, my wife and I started an alarm installation, guard and patrol business in Victor Harbour, a seaside town 80km south of Adelaide, South Australia. I previously had ten years experience as a technician with companies such as Chubb and Wormald and a further 20 years experience as a guard. My wife, who has a good technical background, managed the office and staff. The business consisted of three alarm technicians, two patrol officers and several casual guards. Our core business was the electronics division the manpower division; evolved to service our existing clients.

Within five years the company dominated the market in our region as we offered a unique point of difference from our competitors. Once we had reached our 9th year, we found that our client base had grown to such an extent, that we needed to review our direction and commit to and plan our exit strategy. We had initially set a long-term goal to sell the business after 10 years, so it was good to see we were on track. Our decision to exit was a lifestyle choice based on our ages and desire to pursue other interests and goals, and to ensure we did not burn out or fall into the trap of working for so long that it would impact upon our health, and force us into a fire sale.

Once committed to selling the business, it was estimated that the process could take 12 to 24 months. This would include spring cleaning our operations, tightening the nuts and bolts, so to speak, as well as identifying potential buyers to whom we could market the sale. We enquired about the appropriate sale mechanisms and subsequently met with a conveyencer, a broker and a solicitor. We realised none of them had any knowledge of the industry, and decided to initiate the sale ourselves. This involved the preparation of a detailed company prospectus taken from draft to final presentation copy within a few months, with no outside help other than the insight gained from a couple of consultations and information available on the internet! This saved us the expense of set-up fees and commission. A solicitor was engaged at the final contract stage of the negotiations.

Before we could offer our business for sale we had to ensure all of our commercial, corporate and government clients were on a contract. When a contract is passed on from the vendor to the purchaser, a letter (novation agreement) authorising the handover of contractual agreements must be in place. This can be time consuming, I would recommend entering this as a clause within the initial contract with a client to ensure that contracts can be upheld upon sale of the company and, therefore, a separate novation contract would not be required and would preserve privacy throughout the due diligence period.

In providing due diligence to any prospective buyer, let’s not forget that they may also be a competitor. So, handing over details of your operations is a bit daunting. Once the vendor receives a reply to our prospectus (an ‘offer of intent’) and it is accepted, the signing of the confidentially agreement protects the vendor from the misuse of any information supplied to the purchaser, and is an indication you have a serious buyer. Be prepared for a buyer to request an exclusivity agreement that locks you into negotiation with them only.

The supply of more detailed information other than the general overview that the prospectus provides must now be furnished. Financial statements as well as departmental breakdowns detailing separate figures for service, installations, upgrades, monitoring, alarm response, patrols and guards must be provided. The prospective buyer may not have an interest in purchasing the entire business, and this will give the option of adjusting the sale to either electronics or manpower services as we did.

In our case, we only sold the big ticket item – the electronics / monitoring division – however maintaining the manpower side of the company provided support in the form of alarm response to the purchaser, and provided additional value to the sale of the electronics division, especially as it helped reduce attrition because clients still have a relationship with us after the sale. The manpower division also continues to provide us with an income at a fraction of the hours we used to work.

During the negotiations, it was important to consider the employees; as we were a family business with our eldest son and his schoolmate employed as technicians. We had an obligation to see that their future employment was secure. The purchaser did hire our son, and our other technician was placed with another company.

The purchaser, as part of due diligence requested to see three months of incident reports to see how ‘clean’ our systems ran, an easy enough task thanks to webquery access where we could access control room data directly without having to request it from the control room. The most desirable asset for acquisition is the number of monitored lines. Secondary, is additional contract service agreements for service and routine maintenance. The cut over of monitored lines will need to be seamless from the outgoing control room to the incoming control room, a review of your obligation to the outgoing control room in terms of notice and any other contractual obligations needs to be considered.

As a bureau it was paramount that we owned the dialler phone line number (receiver) that each clients alarm system reports on. Initially this was not the case for us. When we started our business, we were allocated a shared receiver number. Some 18 months later, at our request, the control room then allocated our own receiver number. The porting of clients is impossible if using the monitoring stations shared receiver number. It was a preferred requirement that the receiver number(s) be an asset for acquisition purposes. As we had a good relationship with the outgoing control room, they were cooperative with our request to provide  the incoming provider with an electronic NTBC file, which was a download of clients from ADSW (Access Detection System for Windows, monitoring service software). This went ahead during the latter phase of negotiations as the file had to be uploaded and checked prior to the agreed sale/transfer date which was to be the date that the actual contract of sale was to be signed! So the main asset was already technically in their possession, but could not be officially cut over until the agreed date and time.

Before estimating the value of the business, we collated the last three years of financial statements and obtained current year-to-date estimates from our accountant. We used a formula we thought best suited our type of business with high annual growth rate to capitalise on that growth. These same figures were then readily available to be supplied to the purchaser on request.

Rather than offering our business to the general market place through standard advertising, we selected a handful of Adelaide-based companies that we thought would be in a strong financial position to purchase, and whom would benefit from expanding their existing enterprise into our regional area. With our company in a healthy state, we maintained confidence throughout the sale process. Our philosophy was that we did not have to sell. Our business, already known for its professionalism and tight geographical market and location, was highly desirable. This was not a forced sale. Our future lifestyle was dependant on a high yield, and we got it. We now have a fruitful relationship with the purchaser, and may have the prospect of selling them our manpower services down the track; which would be a completely new venture for them.

The negotiation part of the deal is always daunting, and you should go through the contract with experienced negotiators. Know exactly what you want before you enter negotiations, and do not agree to anything or sign anything without first going home to consider the offer. Request all offers in writing (email) then, if needed, consult your solicitor or accountant. I would expect four meetings before a final resolution is reached.

The one clause that will give concern is the ‘claw back provision’ – the retention of part of the agreed sale price for a set period during which any attrition of monitored clients can be offset at an agreed rate. In our sale, we agreed that the reverse should also be considered – that the same amount be added if additional clients were put online as a result of completion of jobs or referral. Retaining the manpower side to support the purchaser, we were confident of minimal attrition, and hoped that any attrition would be offset against new clients.

The company prospectus should have the following content:

  • Organisation Structure: List management and employee positions and duties.
  • Skill Retention: Detail qualifications, experience levels and scheduled refresher training required to ensure the skills of staff are maintained. Note allocation of responsibility as appropriate to each staff member – any new or additional responsibilities for staff members decided upon by the successor is to be documented and communicated to staff during the transition period
  • About the Directors: Brief overview of qualifications and experience of directors/owners
  • Business Profile: Comprehensive view of your beginnings, growth and current position, include overview of client base, number of commercial and domestic clients, preferred alarm equipment used and your point of difference that separates your business from the others in your area.
  • Company Profile: Company philosophy, memberships, accreditations, insurances and licenses
  • Marketing Plan: Advertising, marketing budgets, website, logos, letterheads, branding and future expansion.
  • Succession Strategy / Timetable: Short list potential successors, supply company prospectus and sale price, confirm interested successors, supply company information and due diligence, finalise sale price and contractual agreement and transition period .
  • Risk Management: Offer services of management for a predetermined time during the transition period to assist with all facets of the hand over.
  • Legal Considerations: Confidentiality form supplied by vendor, sale of business to be compliant with the “Sale and Conveyancing Act”, nominate legal services provider.
  • Contract Variables (Negotiable Considerations For Contract Of Sale): Five per cent deposit paid by purchaser, area of restraint of trade, period of restraint of trade, period of confidentiality, period of non-solicitation of employees, subject to finance approval by purchaser`s bank, land involved with sale of business, property that is currently part of the business, chattel mortgages, finance and personal vehicles, long services leave, personal leave and associated staff entitlements, exclusive agency, franchises and rights.
  • Plant and Equipment: Complete list of all assets to be included in the sale.
  • Client list: Government, Corporate, Commercial and Domestic.
  • Price & Terms: Replies to be lodged within 14 days from receipt of the document, all questions and enquiries to be in writing (email), exclusive rights to negotiate to be determined, price and conditions to be negotiated prior to accepting letter of intent.
  • Letter Of Intent: Deposit price as agreed, sale price and conditions as negotiated If accepted, full disclosure of financials supplied by the accountant, letter of intent will be accepted or declined within seven days of receipt, contractual agreement supplied by buyer to follow due diligence.
  • Current Value Of Business: Price Range calculated on Multiple of Cash Flow Method which is based on Sellers Discretionary Cash Flow (owners benefit)
  • annual pre tax profit + owners salary + owners benefits + interest + depreciation
  • Multiples then applied as required (x 1.5 / 2 / 2.5 / 3)
  • Percentages Of Above Formulae: 70% of current year to date; 20% of previous year; 10% of year prior to that [adjust the percentages over the three years to suit your best results, must total 100%]

Note: There are three main types of calculations broadly accepted by accountants:

  • Cash Flow Method Calculation: Add your profit before tax, add any salary for the year, add cash payments, dinners, trade shows with accommodation etc. Add any interest paid (loans etc) add depreciation on any vehicles or plant. The total for the current year is multiplied by 70%, do the same for the previous year and multiply by 20%, then do the same for the year before that and multiply by 10%. Add these together. At this point it is your choice to multiply that figure by 1.5, 2, 2.5 or 3. This should give you a fair indication as to what you can ask.Remember, if you go too high you will not get any offers. Once a price has been worked out then that should be your bottom price when you put forward your asking price. Word it as  a “price range” between this and that.
  • Profitability Breakdown per Division: (Owners benefit calculation not used, Profit and Loss only)
  • Electronic services, monitoring, guards, patrols, cash in transit.

Note:  Include (all figures supplied are approximate, exact calculations can be formulated on receipt of documentation supplied and certified by companies chartered accountants).

Business Review: Include phrases such as: “Well established business”, “sales and profit risen consistently over past three years”, “significant sales from repeat customers”, “revenue from recurring charges”, “management (in part) and staff to stay on if required”, “dominant market share, desirable geographical area of high growth”, “profitable projected performance”, “extensive client base, excellent growth capabilities”, “high return on investment.”

Confidentiality Agreement: Supply an agreement to all interested parties and have it signed prior to divulging any details about your company.

Summary: Finish the prospectus with a positive overview of the benefits of purchasing your business.


Disclaimer: The information contained here is based on the author’s experience and is not intended as legal or operative advice. It is supplied as a true account for example only.