When opportunity knocks, will you be prepared?

Friday, August 1, 2003

Is your company prepared to take advantage of opportunities and does your company have the operational, financial and informational resources in place to successfully complete a transaction? If so, you should be in a position to grow your business by buying another company, sell your company to realize the value of your efforts or obtain financing to achieve your strategic plan.

In the security alarm industry a company’s most valuable single asset is its customer base (i.e. Recurring Monthly Revenue or RMR). In addition to having adequate information to manage the day-to-day operations, maintaining information about the performance of the company and its customer base is absolutely critical to completing an acquisition, sale or refinancing. The following steps should be followed to ensure that adequate information regarding the performance of the customer base is available should opportunity present itself.

- Maintain well-organized and well-protected customer contract files in a central location. The customer contract is the initial proof that a customer relationship exists and critical components of the relationship are documented. Efforts to locate each customer contract should be reduced to a minimum.

- Maintain customer data with a comprehensive, integrated software package built on a well-designed database. The most advanced software packages will include, among other things, billing, collection and customer relationship management functions in addition to integrating with a general ledger. The data should include critical components of the customer contract as well as customer transaction history and customer relationship management information. Archive the customer database at least monthly and maintain a detailed reconciliation of the changes in RMR between each period. The customer data should be available to export electronically into other software packages that can be used to analyze such data.

- Implement sound accounting policies and procedures to ensure that the company’s financial statements are accurate and maintained on a current basis. This includes the preparation of account reconciliations for significant account balances as well as reconciliations between the RMR detail and the general ledger. Monthly financial statements should be in enough detail to allow for analysis of divisional performance, creation cost multiples and other relevant statistics.

If you decide to proceed with a transaction, the due diligence team will analyze the data and reconciliations for trends and attempt to understand the reasons for the trends. Their analysis will include comparing information (preferably in an electronic format) from the customer database, financial statements and bank deposits to ensure that the information provided is complete and accurate. The availability and accuracy of the above information will assist an acquirer or lender to get comfortable with the existence and quality of the customer accounts, the validity of the amount of RMR, the attrition rate experienced over a period of time and the financial results of the company.

Attention to building rapport and trust are the foundation to a successful transaction and a necessary prelude to negotiations over financial issues. Price is defined to include not just the dollar amount of the transaction, but also the form of the price and other items such as representations, warranties and/or covenants. A high level of trust among the parties tends to soften the negotiations and results in a smoother closing of the transaction. If you romance the deal properly by considering the successes and personal needs of the other party, you will achieve better results and face fewer problems or disputes.

Perceptive strategic planning in the beginning will help determine the right course of action for your company and will help identify the most logical buyer, seller or lender to meet your needs.

Michael D. Fox is managing director of the Security Alarm Industry Group at American Express Tax and Business Services. He can be contacted at 312-634-4311 or via email at Michael.D.Fox@aexp.com.