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Is now a good time to sell
my security guard company, or should I wait?
The current market for the sale of security guard companies in the
U.S. is very different from any of the times we've experienced in
the 30 years we've been managing sale transactions in the
industry.
Unlike times in the past, the aggressive buyers in the market today
are not buying companies just to add volume. They're looking for
companies that meet the buyers' more stringent criteria as to quality
and geographic locations. This means many owners wishing to sell
in today's market will unfortunately find that their companies are
not saleable at all, or if so, at a greatly reduced price.
Whether or not an owner should consider selling in today's environment
depends on how prepared the company is to meet these higher standards
set by the aggressive buyers.
But the good news is that high quality companies operating in desirable
locations and prepared to pass the buyer's stringent due diligence
are commanding unprecedented high multiples, which equate to higher
prices in today's market.
As for the future, obviously no one knows what the multiples will
be two or three years from now, or even six months. I don't think
the multiples will get any higher unless the industry is able to
greatly improve margins; and competitive pressures will probably
not allow this to happen. And I think buyers will get even more
critical in evaluating purchase candidates because of the increasing
importance placed on hiring standards, risk tolerance and geographical
preferences.
Since many of the changes that will need to be made in order to
maximize the company's selling price may take several months or
years, we're advising owners to start making the changes now. Return
to FAQs... |
How can I determine if my company is saleable
and what can I do to make it more attractive?
Based on the changes that have taken place in the market
for selling security guard companies over the last couple of years,
we've learned the increasing importance of planning for the sale.
As mentioned above, buyers are no longer just buying volume to boost
sales. They're looking for companies with compatible operations
and accounts that can be easily integrated into their existing business.
If buyers can integrate these companies with minimal disruption
or adjustments, they will realize a greater return on their investment
sooner rather than later. This means that they no longer buy companies
expecting to make changes after they buy it. The buyers now want
the changes made before the sale. This shift in the buyers' criteria
delayed, or in many cases, terminated the prospects of many recent
would-be sellers whose companies did not meet these new stringent
standards.
Improving the saleability of security guard companies is the reason
we started our Strategic Planning Engagement. We
work with owners wishing to sell in the next 12 to 36 months or
more. This engagement is geared to identify the changes needed to
make companies meet the more stringent standards of buyers, and
thereby enhance their value for the future sale.
Another reason we have decided to get involved earlier in the anticipated
sale process is that our firm benefits most when we can make our
client-companies more valuable. Since most of our revenue comes
in the form of contingent fees (based on a percentage of the eventual
selling price), the more value we can add to the company, the more
our firm benefits in an eventual sale. In effect, the sellers and
our firm come out winners.
In a typical strategic planning assignment, we will come to the
company's office (or off-site) to examine and evaluate several aspects
of the business that are important to the eventual selling price
of the company. We'll concentrate on five areas:
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Guard account characteristics |
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Personnel |
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Financial reporting |
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Risk management |
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Operations |
Return to FAQs... |
How is the selling price
determined?
In spite of what you might have heard on the street that
the valuation of guard companies is based on multiples of gross
monthly revenue or percentages of annual revenue, this just isn't
true.
Unfortunately, there's no longer a one-size-fits-all formula for
determining the likely selling price of a security guard company.
There are many differences and variables when comparing companies.
Variables such as these determine the buyer's level of interest
and ultimately the selling price:
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The owner's operating territory |
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The company's operating and account characteristics |
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The size of the company |
Value is also affected by the buyer who may be the most aggressive
in the market when the owner is ready to sell. There are two types
of buyers for security guard companies - investment groups and synergistic
buyers (i.e., other security guard companies). Both types of buyers
go through a detailed profit model computation to determine expected
profits from the company after the acquisition, and then apply their
models to determine their return on investment and offering price.
Each buyer uses a very different approach in determining an offering
price. Investment groups are looking
for large flagship companies with $50 million in revenue or more.
They may pay as much as 8 times the SELLER'S EBITDA (earnings before
interest, tax, depreciation and amortization), not the buyer's.
Usually, these groups pay only 5-6 times EBITDA for non-strategic
acquisitions.
The synergistic buyer, on the other hand, prepares
the profit model based on what the BUYER will make after considering
the synergistic savings they will bring to the consolidation, such
as elimination of back-office costs, savings on worker's compensation
rates and elimination of the salary for the seller (who usually
leaves after the sale). Surprisingly, the synergistic buyer's offer
is usually much better than the investment group's even if the investment
group is using a larger multiple on earnings.
When we value a security guard company in anticipating a sale, we
consider both computations. Synergistic buyers do not share the
details of their model with us or the seller; it's all part of trying
to gain leverage in the negotiations. However, based on our experience
in managing the sale of security guard companies, we can anticipate
their maximum price if we know certain characteristics of the selling
company, regardless of the profit or loss the company shows. We
consider about 25 characteristics, including:
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Gross account margins |
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Type of accounts |
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Average account site size |
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Account retention history |
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Number of armed personnel |
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Account contract indemnification language. |
These are also characteristics covered in our strategic planning
assignments.
The gross margin on the accounts has always been an important factor
in the valuation process. However, in today's market, the margin
amount alone is not enough. Buyers today want attractive margins
after considering a respectable wage rate to the guards.
Because the price is ultimately based on these characteristics rather
than the actual profit of the seller, the prices we've received
for many of our clients have been 10 to 50 (or more) times our clients'
reported profits. In other words, it's really meaningless to express
the expected price based on what the seller is showing on its financial
statements.
Once we know the characteristics of the accounts and certain other
things about the company, we can tell our client what to expect
in a sale. The price may be 2 times monthly revenue, 6 times (or
greater), or somewhere in between, as determined by the unique characteristics
of the company. This large spread in multiples of gross monthly
revenue demonstrates why these "street" multiples should
not be used.
Return to FAQs... |
How does the sales trend over the last
few years affect the value of my company?
The company's growth record has become more important in
the valuation process. Although the buyer is basically purchasing
the accounts in place at closing and the personnel to run the accounts,
the buyers are looking to the growth trend as important evidence
of the abilities of the managers going to work for the buyers.
This is why an owner should seriously consider selling when the
revenues level off or the growth slows down. It's an indication
that the owner has reached a "glass ceiling" and the company
starts losing value.
Return to FAQs... |
Does your firm tell the owner what to
expect in the way of price and terms before accepting the engagement
to manage the sale?
Yes. In fact, we insist on an agreement in principle regarding
expected price and terms before we accept the assignment. We've
managed the sale of a lot of security guard companies and know what
to expect in a sale. If the owner's expectations are too high, we
advise the owner to wait until the real value of the company catches
up with the price the owner requires. If the owner tries to sell
the company with unrealistic expectations, the company will not
be sold, and the company's value diminishes for a future sale because
the buyers lose confidence in owners who have a habit of putting
the company up for sale and then withdrawing it from the market.
Return to FAQs...
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