8.31.18 – SSI – Ken Kirschenbaum
Whether it’s time for retirement or just a new adventure, make sure to weigh your nest egg and potential net proceeds. Here’s how.
If you’ve effectively managed your alarm business consistent with proven best practices you may be, and should be, sitting on a considerable nest egg. Whether it’s time for retirement or just a new adventure, the question of whether it is time to sell my alarm company may cross your mind.
For many of you, the equity you have in your alarm business constitutes the bulk of your net worth. Thus, your net worth is intractably entwined with the equity in your alarm business.
Sure, your home and maybe other investments have increased in value, but not likely keeping pace with the increase in value of your alarm company. It’s really a rather simple exercise in arithmetic: your RMR under contract times the multiple being paid.
Fortunately for the alarm industry, the multiple has been fairly constant for a long time. Depending on how you have run your business, particularly which contracts you use and how you get them signed, you can expect 35x, give or take 5x.
That leaves a 10-point spread, and if you’re on the lower end, you deserve it. If you’re on the higher end, you deserve it too. Being smart should have its advantages, and in this business it’s measurable, 10x. Of course, other factors can influence your decision to sell.
I will leave out the obvious, illness and death. The main factor I am thinking about is growth, or the opposite, reduction in RMR. This can be caused by more competition, an aging account base, change in your available selling territory, or internal issues with employees, from sales to technicians.
Loss of a major account can sometimes be the reason your balance sheet goes from black to red. So, shrinking RMR may be the reason that you consider selling out. When you sell out you’ll be faced with new challenges, like where to place your newfound liquidity.
You should think about that before you decide to sell, not after you are staring at your check, wondering where to deposit it and how to invest it. Let’s put aside lifestyle issues. Those matters, not just illness and death, often override a careful decision based on economical or financial considerations.
From a purely financial consideration, however, I think the question is, can you do better with your nest egg than keeping it in the alarm business?
Assuming you like your work, and can still do it, you need to consider your entire compensation and benefits package. Only you know that number. Now figure out the net proceeds you will end up with after a sale of your alarm business. It’s a check with a number on it. You have to deposit it, and then you need to invest it.
Unless you’re “young” and willing to take risks with your life’s work nest egg, you’ll want to be conservative. Putting money out there for “hard money” loans sounds good, until you don’t get paid back. Taking chances on high yield corporate bonds also sounds good, until you don’t get paid back.
Investing in higher paying municipal bonds, like Puerto Rico or Detroit bonds, sounds good, until you don’t get paid back. Soon you find out that “safe” investments pay between 2% and 3%. If your alarm company is not kicking better than that out for you then something is wrong.
If your alarm company is not growing faster than the DOW or NASD or any fund your relatives keep telling you they are in and making a killing, something is wrong.
If you didn’t sell yet, you have time to make it right. If everything is already right, you have time to make it better and rake it in while you’re waiting for a better time to exit your alarm business.
About the Author
Security Sales & Integration’s “Legal Briefing” columnist Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C. His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters.