Don't get too friendly

Ever thought of selling up? Ever thought of buying out someone else? Oddly enough, I have had several conversations over the last couple of months with people who are thinking of doing that. Whether it's an older hand who has had enough of the night calls, or ill health, or the kids are not interested and have gone off and made a life of their own, or even just wanting to cash in for an early retirement, the reasons for wanting to sell up are vast and varied.

The reasons for buying are usually much more simple – it's a fast way to expand a business or an opportunity to expand into another field. Sometimes it 's just an easy way to remove the opposition that has been a thorn in your side. The main problem has always been getting the right buyer together with the right seller and striking the right deal.

Peoples' ideas of a fair and reasonable price for a business vary as much, if not more, than the reasons for selling. So, bearing that little lot in mind it might be worth having a look at the overall picture and see if we can make some sense of it.

Looking forward at the bigger picture (what we are likely to get and the conditions of sale that are likely to be attached) might well make us think differently about the way we look at our company today ... and that might well be the saviour of your pension in later years.

Speaking from experience
Before we go any further I have to admit I am not an expert, but I have had experience of selling a company and I learned a lot from that experience. I have also learned a lot from watching other people selling and buying security companies.

The big question is how you go about setting a value on the company – it's not that easy. The irony is that if a guy has been working to build up a reasonable business for 20 years or more it could make his company harder to sell because of the loyalty factor. For 20 years people have got used to the same friendly face turning up each year for a chat and a cuppa ("While I'm here I'll just have a quick look at your system").

The customer has been converted into a friend and a lot of the small guys are proud of this fact because it speaks volumes about their service – BUT, you try and sell up and you have a problem. The customer just doesn't want a new face, they want YOU and they want to carry on seeing YOU and they find it hard to accept change, and will continue to do so – even after they have attended your funeral! So the first thing you need to look at is how you conduct your dealings with the customer.

OK, being friendly is a good thing but don't get too close. Try to keep it on a professional footing. You must be able to charge a fair and reasonable price, and don't forget, friends always want a bit extra on the service and expect a little off the price. I am talking here of lads turning out during unsociable hours and the customer who is a friend sticking a fiver in your hand and saying "We don't need to send a bill do we?"

You can be friendly, offer good service and still charge a fair price – it's called diplomacy. Always remember, an experienced buyer of companies is going to try and work out how many of your customers will move over without a fuss. If you have been too friendly the take-over acceptance rate will go down and you then lose both a customer and a friend because they will want you to carry on looking after their alarm even though you have sold up. Don't forget, if the buyer has any gumption he will insist on a contract that says you cannot work again in that area for at least three years, so if you fall soft and go to the aid of your old friend you have contravened your contract of sale – and that could cost you dearly.

Many buyers are aware of this factor and insist on you staying on in an "advisory" capacity for a couple of years so that the buyer can wean as many of your customers over to them as possible. They often will not pay the final amount until that day and then they will only pay for the customers they have signed up. Having been too friendly can be to your severe disadvantage in the long term.

Callout charges can also be a problem
With the bigger companies this is not so much a problem because the customer is used to seeing different lads anyway and quite likely the buying company will take on the staff as well just to keep this going. Apart from a new phone number and a different name on the invoice the customer doesn't see a change – unless the buying company hikes up the callout price until the customer screams ... so here is another factor to take into the equation.

A very large company that charges £50-£90 per callout taking over a small company that only charges a £25 callout is asking for trouble. The first bill that hits the welcome mat will have the customers deserting like rats off a sinking ship, so it's no good sitting and scratching your head wondering what went wrong with your "inheritance". You screwed it up by selling to the wrong company and trying to get too high a price. So, lesson two is keep raising your prices in line with inflation. The more your customer is used to paying, the more you will get when you sell. The reasoning behind this is very simple: When you buy an alarm company you are NOT buying a fixed asset but you ARE buying an income, and the higher the income the more you can sell it for. Perhaps it is time to squeeze your price up a little.

Tied customers increase your value
Signed up contracts are another selling factor, particularly if an insurance company is involved. If the customer has got to have a NACOSS certificated and maintained (under contract) system to keep his insurance then we are looking at a "blue chip" contract (with a tied customer) of a much higher value with a much greater chance of keeping that customer after you have "bought the contract". Quite often the selling value is three times the annual income from that system, or even more.

As you come down the line the customers are less and less tied to the contract so the value falls off. NSI (non-ISO 9000) and SSAIB companies can expect to get less per system, perhaps one to two times the annual income. Any company not in a recognised inspectorate has to grab what they can. It all depends on the type of business for sale.

Bells-only domestics are the lowest priced as a rule because if the customer doesn't like the look of you then off they go to your rival and you have just paid for a system that you have no longer got – so the price is adversely affected. If we are looking at domestics with police response where a service contract HAS to be involved, then the price goes up (tied customers remember).

Make sure your customers don’t insist on seeing you only ... it will affect the value of your company

Industrial/commercial bells-only systems come a little better because there is not usually the personal involvement that you get with the domestics. With an insurance requirement, the price goes up again. Then there are the high risk jobs that fall into NACOSS hands ... these make top whack.

I know a small, one-man business with over 3,000 customers. This is an estimate; he has few files and records, very few are on a signed contract. He's a good engineer so very few go wrong and he makes a living doing alterations and additions, following the false alarms round and fixing systems after they fail. This man has got 3,000 friends and nothing to sell after nearly 20 years in the business ... Do you get my drift? This is a crying shame because he has worked hard, he has never failed to look after his customers and he has always given top class value for money. He will be lucky to sell up for the price of a gold watch. He may as well have worked for another company all these years, at least he would have had a few nights off during the month.

Doing it gradually
There is another alternative for the smaller company – the extended changeover period. With this method you don't have to go steaming in blindly to tell the customer that you have sold the business ... all you get for that is a certain number of customers that will jump ship before they know what is happening, and that is another bunch of systems you will not get paid for.

Instead, you tell the customer that you are getting someone else to do the office work and the billing for you. Later you introduce a "new" engineer who is going to take over the day-to-day work of the business. Next comes another company who is "helping out" because you are "not as young as you used to be", and then finally when the changeover has been successfully concluded you can tell the customers that you are retiring ... "but don't worry, all the lads that have been looking after your system for the last two years will be around if you have any problems".

The trick here is to set up the selling price on the number of systems that stay with the new owner for a period of – say – two years after your retirement, and you plan to retire in around two or three years. You can opt for so much now and the balance at the end of the two years. Or you can opt for a wage based upon time spent working (a gradual decrease) or maybe a combination of both. You can agree to have a payment into a joint account for every system as and when a new contract is signed, which you can remove when both seller and buyer are happy that the customer is settled with the new regime.

If you are the buyer of an alarm company then it is always good sense to have a right good look at the paperwork before you buy. Looking at how the company was run will give you an insight into any management problems that may crop up later. Looking at the system files will give you some idea of the ratio of problems to systems.

The last thing you want to buy is a few hundred systems that are nothing but trouble. Have a look at the invoicing and the complaints file (if they have one). The way they have dealt with the customers in the past will speak volumes about them and about the type of complaints they get.

If they don't have a complaints file, be very careful, you are beginning to buy blind.

One thing is certain above all – both buyer and seller must make every effort to keep the customer happy: one for the retirement pay packet, the other for the continued income you were expecting when you bought.

It must be a joint effort from all concerned and there can be no "This is what we agreed – it's your problem" attitude or the whole thing will fail. Goodwill will be lost and one, or perhaps both, will come out the loser.

Honesty is essential
Buying and selling your business is a rocky road that relies heavily on the goodwill between the buyer and the seller and it is the one time when both parties have to be dead straight and honest with each other or, as I said, the whole thing fails.

The one thing that comes out of all this is that if you want to sell your business – look very carefully at the company that wants to buy. Look at their attitudes, their prices and their technical ability.