5 Ways to Maximize the Value of Your Private Security Company
Over the last 12 months there has been a lot of mergers & acquisitions (M&A) activity in the security sector. For several years, buyers have been focused on IP-based products and solutions (i.e. video surveillance). Convergint’s series of recent acquisitions and the announced Johnson Controls/Tyco merger might suggest that M&A interest has focused on systems integrators and service providers, but the data shows there is strong demand for all types of security related businesses.
Strategic buyers have dominated security sector M&A activity in 2016 and early 2017, as leading players compete to “own the market.” Over the last 12 months, strategic buyers have closed over 70 acquisitions, with the high level of overall activity suggesting that 2017 could surpass the record number of deals closed in 2016.
All of this is to make the point that it is a seller’s market if you own a security related company. If you are thinking of selling, now may be a good time to explore your options. Unfortunately, many owners miss out on maximizing the value of their companies because they are unfamiliar with how the process works. Here are five things you can do to help you ensure you receive top dollar for your company when you decide to sell.
1. Understand the Most Likely Buyer for Your Business.
Buyers of businesses with revenues of $1 million or less tend to be individuals who live within a 50-mile radius of the company they are interested in. However, as the size of the business increases, strategic buyers become more interested —and these buyers are typically not local. For companies with revenues of $5 million and up, financial buyers, like private equity groups, as well as strategic buyers become interested. A study by the International Business Broker’s Association found that the most likely buyers for businesses valued at $5 million or more, were companies owned at least in part by private equity groups, and the second mostly likely group was strategic buyers that wanted to make a synergistic or strategic acquisition.
What does this mean for you? If you own a security business with $1 million or less in revenues, your buyers—besides being local—will likely be first-time business owners, looking to acquire a job. As a result, your marketing materials and sales pitch should address the concerns that these buyers may have.
However, owners of larger businesses should be prepared to address the concerns of more sophisticated, financially-driven buyers. That means to command top dollar for your business you will need to develop an offering package, including a pitch book, a financial model and detailed historical financial statements.
2. Set Personal and Financial Goals. The first step in ensuring a successful exit is to have a clear idea about how much money you need to meet your financial goals. While this number has nothing to do with the value of your company, it will help you evaluate opportunities and make the right decision. For example, if you know you need $3 million, after tax, to retire, and your business is valued at $2 million, it may not make sense to sell it now. Instead, it may make more sense to spend the next 2-3 years preparing your business for sale so you can realize your financial goals. Have an honest conversation with your wealth manager or financial advisor and do some retirement planning to figure out what your nest egg needs to look like before you think about selling your business.
3. Understand the Value of Your Business from a Buyer’s Perspective. The number one reason most of private companies don’t sell is that the seller has an unrealistic expectation of value. One of the most important things you can do before starting the sales process is talk with an experienced M&A advisor or valuation firm to get an independent appraisal of your business. These objective, third-parties will use the same methodologies that buyers use to determine the value of your company. An M&A advisor with experience in the security sector can also give you advice and guidance on pricing trends in the industry and value drivers. Many otherwise savvy business owners don’t take this step, which can result in them spending a lot of time and money trying to sell their business, only to be disappointed at the results. The more educated you are about the M&A market and business valuation principles, the more likely you are to be successful when you sell your security business.
4. Use the Right Process to Maximize the Value of Your Company.
The best process to use to sell your company depends on its size and market appeal. If your company has less than $2 million in revenue, the best process is the traditional business brokerage approach that includes listing the company on multiple M&A websites and responding to buyers when they request additional information.
However, for companies with over $2 million in revenues, it may make sense to run a controlled auction process. In this case, your M&A advisor will put together a targeted list of financial and strategic buyers that may have an interest in your company. He will contact them directly and send them with a teaser that provides an overview of your company, but does not disclose its name. If they are interested, he will get them to sign a nondisclosure agreement and then send them a formal offering package and transaction timeline. A typical marketing program for a security company might involve contacting 200-300 potential buyers simultaneously. The goal here is to get as many buyers as possible looking at your company at the same time and to make them aware they are in a competitive process. This has several advantages. First, it speeds up the transaction timeline, ensuring a faster and more efficient closing. Second, it ensures buyers put their best offers on the table first because they know other buyers are also bidding. Last, it provides you with negotiating leverage because you will most likely have multiple offers to choose from at the end of the process.
5. Get Good Advice.
Regardless of the size of your business, the most important thing you can do is work with an M&A advisor to run the controlled auction process. Running a sell-side process is time consuming and you don’t want anything to distract you from the day-to-day operation of your business because a dip in revenues or net income in the year before a sale can have a big impact on the value of your company. Selling a business may be the single most important decision in your life time, so make sure you work with someone who is an expert in the process and can coach you along the way.
By Rich Jackim, J.D. Managing Partner at Jackim Woods & Co.
Jackim Woods & Co. is a leading mergers & acquisitions advisor focused on providing senior level attention and flawless execution to clients in the security industry nationwide.
Rich Jackim is an experienced mergers and acquisitions advisor and a retired mergers and acquisitions attorney. He has over 20 years of experience advising owners of middle market companies and their boards of directors on mergers, acquisitions and divestitures. During his career, Rich has been involved in over 70 mergers or acquisitions of middle market companies worth over $2 billion. Rich is also the author of the critically acclaimed book, The $10 Trillion Opportunity: Designing Successful Exit Strategies for Middle Market Business Owners.
To arrange a free, confidential conversation about your options, please contact Rich Jackim at (224) 513-5142 or firstname.lastname@example.org.