Advice to First Alert dealers: Plan ahead for a sale

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Thursday, November 20, 2008

ORLANDO--A crowd of dealers--some who appeared to be interested in selling their companies and others who may be looking to buy--gathered in a conference room here on Nov. 14, during Honeywell's First Alert Professionals Convention, for an educational session on succession planning.
Dealers had been requesting information on this topic, said Greg McLochlin, director of the [Honeywell] dealer development group, during his introduction of presenter John Colehower, a former principal of Matrix Security who has started a new company, Mergers & Acquisitions.
The statistics compiled and presented by Colehower help explain that demand. "Eighty percent of all [alarm company] businesses are family owned. Four out of five companies are controlled by the founder. Thirty-three percent of the owners are older than 60 years old, and 11 percent are older than 70 years old," Colehower said.
"That means," he said, "that in the next five to six years, 40 percent of family-owned businesses will be for sale."
Take stock of what your company is worth, he advised. "Buyers usually value your business based on a multiple times your qualified monthly recurring monthly revenue," he said, adding, "not all RMR is created equal."
He went into detail and fielded questions about how buyers determine the multiple they're willing to pay, including: contracts; consistency in product line; ability to download accounts ("adds tremendous value"); billing system; central station; attrition ("it's got to be quantifiable"); insurance ("can you produce certificates?"); and employee matters ("confidentiality, non-solicitation agreements").
Looking into these matters and improving any systems five years before a sale, rather than six months before a sale, will make a business worth more. Some seemingly simple tasks can take a long time. "It takes 10 years to transfer from a C-corp to an S-corp [for tax purposes]," Colehower said.
For company owners who would like to pass the business along to the next generation, there are a variety of options (both good and bad, in Colehower's opinion), and for some the best option is a transfer that occurs over many years. The key is to start discussing options with professional planners and family members early on.
Colehower said that according to his research, "88 percent of the [family-owned] alarm company owners want their company to stay in the family." The reality, however, is that only 30 percent survive as a family business through the second generation, 12 percent to the third generation and three percent to the fourth generation.
Whether they plan to sell their business to an outsider or transfer it to the next generation, Colehower had some pithy advice: "Prepare for your exit now."

For more on the First Alert Professionals Convention, see the January issue of Security Systems News.