This report on How To Sell Your Security Integrator from last year may be of some help.
Im familiar with that, thanks Brian.
Interesting here is the net profits are much larger than usual, but there is a distinct risk in that 3 clients make up such a large part of the revenues. Was curious what other people thought if they had to put up their own theoretical benjamins.
A business that small with such highly concentrated revenue presents significant risk. Lose one of the clients. Lose one of the employees. Business goes down 30%, 50%, etc.
The challenge here is that if the owner thinks s/he is making a lot of money doing his thing (which the reported high net earnings implies), s/he will reasonably ask for a high valuation since they will think "Why would I take $500,000 for the business if I make $250,000 a year, etc." But the issue for you is 'Why I would pay $1.5 million for a business that might be worth nothing once the owner leaves?"
I am looking forward to what others recommend here. Could be tricky.
Too risky. Let's say the lead tech isn't happy with the purchase and leaves the company -gets offered $5 more an hour from a competitor, or decides he was really the one largely responsibe for the companies prior success and starts his own thing. Now you just bought a mid level $15 an hour tech and a few customers for $1.5M. You could have organically entered this market with a GM, salesman, couple techs/trucks, project specialist and still spent FAR less.
In thinking more about this, it seems like you have an opportunity to purchase a fairly basic small integrator outfit, with the possible upside of some higher than average gross profits for at least the next couple of years.
It seems like the owner's primary motivation for selling is retirement, and not a recognition that his business is in trouble (though it is always possible they know something they are not telling you).
There is some upside for you in terms of expansion opportunities, but also a lot of potential headaches (no surprise, I'm sure).
With the above in mind, I would probably offer something along the lines of $300-$350K upfront for the business, agreement to keep the owner on for another year at current salary, and then an earn-out that is tied to maintaining the above-average gross profits for a couple of years.
Structuring the deal with a variable earn-out should prevent you from having to accurately predict the future of the business. If the business has the future earning potential it claims, they will reap the benefit of that, if it does not, you will not have overpaid for it.
Part of the deal would also cover anticipated expenses that you would take on, (lease a new location, purchase additional vehicles/equipment, etc.) so that they do not accuse you of just spending all the profits to cheat them out of their earn-out.
IPVMU Certified | 01/24/17 03:19pm
There is an undefinable risk in buying small companies, and that is the personal relationships that center around the owner, or a dominate person in the operation. Back in the 90s I worked for Tyco, and at the time they were on a buying binge. They bought large industry players like Simplex and ADT, but they also bought many dozen, mom and pop operations, primarily in the sprinkler business. It was not unusual for a 100% staff turnover a year after the small business purchase. Employees did not like going from a small business with their personal relationship with the boss, to a very structured corporate business model. Too many times, all Tyco had to show for a purchase was some inventory and a few of the customers, that did not follow the old employees to their new employer. And Tyco was in the business of buying businesses.
This is not to say that you will have the experience as a large multi-national corporation, but there is a people risk that you can’t evaluate. So, pay close attention to the down side, and think about how you will deal with issues that are 3 hours away. When things go south, you will be forced to decide where to spend your resources. Focusing on a failing remote office can affect your present business and family life. All that said, perhaps the best way to mitigate the risk is to put a trusted employee in charge of the office, as John suggested. If you don’t have that type of talent, perhaps you should start grooming that talent for a future opportunity?
I think it is risky .The revenue is small ,gross profit is not satisfactory compared with the cost.Number of customer is limited .This business can be constraint due to the loss of 1 employee or 1 customer.
1.5x-2x net if the owner stays on for a long transition period for accounts. The owner is the salesman and that is sole the value of that business. To be honest, you would have less risk just putting out 150k of your own money to recruit a senior salesman and bootstrap. 800k run rate is light for a 20 year vet.
Protection One / ADT | 01/30/17 02:21pm
Some key considerations include,
-The distance from your central headquarters location - Three-hour trips to get this company integrated into your business may be taxing.
-Where is the market for the proposed company? Does it a line with your current company's product and service offerings?
-What are your goals for this company? How do you see it growing? (And, why hasn't it grown in that manner already?) Does this acquisition fit with your vision for your company's future?
The last consideration is critical. Before making a final buying decision, get a plan for this business. Then, estimate the gross profit at your projected goals. Then, identify what break-even date and return on investment over the first five years. Only then can you come up with a buy/don't buy decision. This will guide your offer.
While there are many concepts on the valuation of security companies, smaller integrators will be outliers to most if not all of the standard models.
Last note, conduct thorough due diligence regarding inventory, existing contracts, approved but not started work, and proposed work. Make sure it is all real.
Hope this helps.